Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

** **

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

** **

**For thequarterly period ended SEPTEMBER 30, 2008**

** **

**OR**

** **

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

** **

**For thetransition period from                  to          **

** **

**Commission File Number  001-33806**

** **

**OSGAMERICA L.P.**

(Exact name of registrant as specified in its charter)

** **
| **DELAWARE**                                                   | ** ** | **11-3812936**                    |
|----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (IRS Employer Identification No.) |

 

| **Two Harbour Place, 302 Knights Run Avenue,  Suite 1200, Tampa, FL** |   | **33602**  |
|----------------------------------------------------------------------------|--------|------------|
| (Address of principal executive offices)                                   |   | (Zip Code) |

 

| **(813) 209-0600**                                      |
|---------------------------------------------------------|
| Registrant’s telephone number, including area code |

 

**None**

Former name, former addressand former fiscal year, if changed since last report

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.    Yes      x     No       o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinitions of “large accelerated filer”, “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |   | Smaller reporting company o |
|--------------------------------|--------|--------------------------|--------|------------------------------|--------|----------------------------------|

#  

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    Yes o    No   x

 

Thenumber of common units outstanding as of October 31, 2008 was15,004,500.  The number of subordinatedunits outstanding as of that date was 15,000,000.

 

 

 

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TABLE OF CONTENTS

 
|          |   |                                                                                        |   | **Page** |
|---------------|--------|---------------------------------------------------------------------------------------------|--------|----------|
| PART I.  |   | FINANCIAL INFORMATION                                                                       |   |     |
|          |   |                                                                                        |   |     |
| Item. 1.      |   | Condensed Consolidated  Financial Statements                                                |   | 3        |
|          |   |                                                                                        |   |     |
| Item 2.       |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 15       |
|          |   |                                                                                        |   |     |
| Item 3.       |   | Qualitative  and Quantitative Disclosures About Market Risk                                 |   | 26       |
|          |   |                                                                                        |   |     |
| Item 4(T).    |   | Controls and  Procedures                                                                    |   | 27       |
|          |   |                                                                                        |   |     |
| PART II. |   | OTHER INFORMATION                                                                           |   |     |
|          |   |                                                                                        |   |     |
| Item 1.       |   | Legal Proceedings                                                                           |   | 27       |
|          |   |                                                                                        |   |     |
| Item 1A.      |   | Risk Factors                                                                                |   | 27       |
|          |   |                                                                                        |   |     |
| Item 2.       |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 28       |
|          |   |                                                                                        |   |     |
| Item 6.       |   | Exhibits                                                                                    |   | 28       |
|          |   |                                                                                        |   |     |
| SIGNATURES    |   |                                                                                        |   | 30       |

 

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**PART I– FINANCIAL INFORMATION**

 

**ITEM 1.****                            ****CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 
|   |   |                                                                                                                                                                                                                                             |   | **Page**   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|
|   |   |                                                                                                                                                                                                                                             |   | ** ** |
|   |   | Condensed Consolidated Balance Sheets at  September 30, 2008 and December 31, 2007                                                                                                                                                     |   | 4          |
|   |   |                                                                                                                                                                                                                                             |   |       |
|   |   | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2008 and Condensed  Predecessor Combined Carve-out Statements of Operations for the three and  nine months ended September 30, 2007 |   | 5          |
|   |   |                                                                                                                                                                                                                                             |   |       |
|   |   | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2008 and Condensed Predecessor  Combined Carve-out Statement of Cash Flows for nine months ended  September 30, 2007                          |   | 6          |
|   |   |                                                                                                                                                                                                                                             |   |       |
|   |   | Condensed  Consolidated Statement of Changes in Partners’ Capital for the nine months  ended September 30, 2008                                                                                                                        |   | 7          |
|   |   |                                                                                                                                                                                                                                             |   |       |
|   |   | Notes to Condensed Consolidated and Condensed  Predecessor Combined Carve-Out Financial Statements                                                                                                                                               |   | 8          |

 

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**OSG AMERICA L.P.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**DOLLARS IN THOUSANDS**

 
| ** **                                                                     | ** ** | **As of  September 30, 2008** | ** ** | **As of  December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **(Unaudited)**                              | ** ** | ** **                                  | ** ** |
| **Assets**                                                                     | ** ** | ** **                                   | ** ** | ** **                                  | ** ** |
| **Current Assets:**                                                            |       |                                         |       |                                        |       |
| Cash and cash equivalents                                                      |       | $                                            | 33,095     |                                        | $          | 3,380 |   |
| Voyage receivables, including unbilled of  $4,776 and $4,107                   |       | 17,580                                       |       | 26,263                                      |       |
| Other receivables                                                              |       | 6,871                                        |       | 7,146                                       |       |
| Inventory                                                                      |       | 3,876                                        |       | 2,997                                       |       |
| Prepaid expenses and other current assets                                      |       | 3,989                                        |       | 3,961                                       |       |
| Total current assets                                                           |       | 65,411                                       |       | 43,747                                      |       |
|                                                                           |       |                                         |       |                                        |       |
| Vessels, less accumulated depreciation of  $78,143 and $59,568                 |       | 411,803                                      |       | 405,447                                     |       |
| Vessels under capital leases, less  accumulated amortization of $0 and $80,414 |       | —                                       |       | 21,246                                      |       |
| Vessel held for sale                                                           |       | 3,000                                        |       | —                                      |       |
| Deferred drydock expenditures, net                                             |       | 28,874                                       |       | 16,177                                      |       |
| Investment in Alaska Tanker Company, LLC                                       |       | 2,789                                        |       | 5,782                                       |       |
| Intangible assets, less accumulated  amortization of $8,433 and $4,983         |       | 83,566                                       |       | 87,017                                      |       |
| Goodwill                                                                       |       | 62,874                                       |       | 62,874                                      |       |
| Other assets                                                                   |       | 12,921                                       |       | 8,822                                       |       |
| Total assets                                                                   |       | $                                            | 671,238    |                                        | $          | 651,112 |   |
|                                                                           |       |                                         |       |                                        |       |
| **Liabilities and Partners’ Capital**                                     |       |                                         |       |                                        |       |
| **Current Liabilities:**                                                       |       |                                         |       |                                        |       |
| Accounts payable and accrued expenses                                          |       | $                                            | 20,721     |                                        | $          | 19,522 |   |
| Advances from affiliated companies                                             |       | 10,295                                       |       | —                                      |       |
| Current portion of debt                                                        |       | 2,963                                        |       | 2,834                                       |       |
| Current obligations under capital leases                                       |       | —                                       |       | 6,375                                       |       |
| Total current liabilities                                                      |       | 33,979                                       |       | 28,731                                      |       |
|                                                                           |       |                                         |       |                                        |       |
| Long-term debt, less current portion                                           |       | 122,514                                      |       | 46,753                                      |       |
| Obligations under capital leases                                               |       | —                                       |       | 23,846                                      |       |
| Advances from affiliated companies                                             |       | —                                       |       | 9,657                                       |       |
| Other non-current liabilities                                                  |       | 4,595                                        |       | 1,428                                       |       |
| Total liabilities                                                              |       | 161,088                                      |       | 110,415                                     |       |
|                                                                           |       |                                         |       |                                        |       |
| **Partners’ Capital**                                                     |       | 510,150                                      |       | 540,697                                     |       |
| Total liabilities and partners’ capital                                   |       | $                                            | 671,238    |                                        | $          | 651,112 |   |

 

See notes to condensed consolidated financial statements.

 

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**OSG AMERICA L.P.**

**CONDENSEDCONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT**

**STATEMENTS OF OPERATIONS**

**DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNITAMOUNTS**

**(UNAUDITED)**

** **
| ** **                                                                                                                                              | ** ** | **Three Months Ended**        | ** ** | **Nine Months Ended**           | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                              | ** ** | **Successor  September 30,  2008** | ** ** | **Predecessor  September 30,  2007** | ** ** | **Successor  September 30,  2008** | ** ** | **Predecessor  September 30,  2007** | ** ** |
| **Shipping Revenues:**                                                                                                                                  |       |                                    |       |                                      |       |   |   |   |   |
| Time and bareboat charter revenues (including  $8,127 and $12,697, respectively, from OSG for the three and nine months  ended September 30, 2008) |       | $                                       | 43,193     |                                      | $          | 29,909 |   | $ | 112,291 |   | $ | 77,335 |   |
| Voyage charter revenues                                                                                                                                 |       | 31,019                                  |       | 25,875                                    |       | 97,181 |   | 77,549 |   |
|                                                                                                                                                    |       | 74,212                                  |       | 55,784                                    |       | 209,472 |   | 154,884 |   |
| **Operating Expenses:**                                                                                                                                 |       |                                    |       |                                      |       |   |   |   |   |
| Voyage expenses                                                                                                                                         |       | 10,509                                  |       | 7,480                                     |       | 33,447 |   | 22,324 |   |
| Vessel expenses                                                                                                                                         |       | 24,857                                  |       | 23,905                                    |       | 70,825 |   | 60,017 |   |
| Charter hire expenses (including $1,791 and  $4,720, respectively, to OSG for the three and nine months ended  September 30, 2008)                 |       | 11,385                                  |       | 4,928                                     |       | 30,230 |   | 7,937 |   |
| Depreciation and amortization                                                                                                                           |       | 12,902                                  |       | 12,234                                    |       | 39,602 |   | 34,698 |   |
| General and administrative                                                                                                                              |       | 4,857                                   |       | —                                    |       | 15,862 |   | — |   |
| General and administrative allocated from  Overseas Shipholding Group, Inc.                                                                        |       | —                                  |       | 5,791                                     |       | — |   | 15,903 |   |
| Loss on impairment of vessel                                                                                                                            |       | 19,319                                  |       | —                                    |       | 19,319 |   | — |   |
| Total operating expenses                                                                                                                                |       | 83,829                                  |       | 54,338                                    |       | 209,285 |   | 140,879 |   |
| (Loss)/income from vessel operations                                                                                                                    |       | (9,617                                  | )          | 1,446                                     |       | 187 |   | 14,005 |   |
| Equity in income of affiliated companies                                                                                                                |       | 1,127                                   |       | 934                                       |       | 2,750 |   | 3,192 |   |
| Operating (loss)/income                                                                                                                                 |       | (8,490                                  | )          | 2,380                                     |       | 2,937 |   | 17,197 |   |
| Other income /(expense)                                                                                                                                 |       | 87                                      |       | —                                    |       | 208 |   | (8 | ) |
|                                                                                                                                                    |       | (8,403                                  | )          | 2,380                                     |       | 3,145 |   | 17,189 |   |
| Interest expense to a wholly owned  subsidiary of Overseas Shipholding Group, Inc.                                                                 |       | —                                  |       | 2,256                                     |       | — |   | 6,426 |   |
| Interest expense, other                                                                                                                                 |       | 1,295                                   |       | 1,267                                     |       | 4,153 |   | 3,805 |   |
| (Loss)/income before federal income taxes                                                                                                               |       | (9,698                                  | )          | (1,143                                    | )          | (1,008 | ) | 6,958 |   |
| Provision for federal income taxes                                                                                                                      |       | —                                  |       | 434                                       |       | — |   | 1,658 |   |
| Net (loss)/income                                                                                                                                       |       | $                                       | (9,698     | )                                         | $          | (1,577 | ) | $ | (1,008 | ) | $ | 5,300 |   |
|                                                                                                                                                    |       |                                    |       |                                      |       |   |   |   |   |
| General partner’s interest in net loss                                                                                                             |       | $                                       | (194       | )                                         |       |   | $ | (20 | ) |   |   |
| Limited partners’ interest:                                                                                                                        |       |                                    |       |                                      |       |   |   |   |   |
| Net loss                                                                                                                                                |       | $                                       | (9,504     | )                                         |       |   | $ | (988 | ) |   |   |
| Net loss per unit – basic and diluted                                                                                                              |       | $                                       | (0.32      | )                                         |       |   | $ | (0.03 | ) |   |   |
| Cash distribution declared per unit                                                                                                                     |       | $                                       | 0.375      |                                      |       |   | $ | 1.125 |   |   |   |
| Weighted average units outstanding - basic  and diluted                                                                                                 |       | 30,002,250                              |       |                                      |       | 30,002,250 |   |   |   |
|                                                                                                                                                    |       |                                    |       |                                      |       |   |   |   |   |
| Basic and diluted net (loss)/income per  share                                                                                                          |       |                                    |       | $                                         | (80.83     | ) |   |   | $ | 271.82 |   |
| Shares used in computing basic and diluted  net (loss)/income per share                                                                                 |       |                                    |       | 19,500                                    |       |   |   | 19,500 |   |

 

See notes to condensed consolidated financialstatements.

 

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**OSG AMERICA L.P.**

**CONDENSEDCONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT**

**STATEMENTS OF CASH FLOWS**

**DOLLARS IN THOUSANDS**

**(UNAUDITED)**

** **
| ** **                                                                          | ** ** | **Successor  Nine Months Ended  September 30, 2008** | ** ** | **Predecessor  Nine Months Ended  September 30, 2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Cash Flows from Operating Activities:**                                           |       |                                                                     |       |                                                                       |       |
| Net (loss)/income                                                                   |       | $                                                                        | (1,008     | )                                                                          | $          | 5,300 |   |
| Items included in net (loss)/income not  affecting cash flows:                      |       |                                                                     |       |                                                                       |       |
| Depreciation and amortization                                                       |       | 39,602                                                                   |       | 34,698                                                                     |       |
| Provision for deferred federal income taxes                                         |       | —                                                                   |       | 1,681                                                                      |       |
| Distributions of affiliated companies, net  of undistributed earnings               |       | 2,994                                                                    |       | 3,618                                                                      |       |
| Other – net                                                                    |       | 1,261                                                                    |       | —                                                                     |       |
| Items included in net (loss)/income related  to investing and financing activities: |       |                                                                     |       |                                                                       |       |
| Loss on impairment of vessel                                                        |       | 19,319                                                                   |       | —                                                                     |       |
| Payments for drydocking                                                             |       | (21,923                                                                  | )          | (11,729                                                                    | )          |
| Changes in operating assets and  liabilities:                                       |       |                                                                     |       |                                                                       |       |
| Decrease/(increase) in receivables                                                  |       | 8,958                                                                    |       | (7,691                                                                     | )          |
| Increase in other assets                                                            |       | (906                                                                     | )          | (1,469                                                                     | )          |
| Decrease in accrued federal income taxes                                            |       | —                                                                   |       | (3,348                                                                     | )          |
| Increase/(decrease) in accounts payable,  accrued expenses and other liabilities    |       | 3,757                                                                    |       | (2,988                                                                     | )          |
| Net cash provided by operating activities                                           |       | 52,054                                                                   |       | 18,072                                                                     |       |
|                                                                                |       |                                                                     |       |                                                                       |       |
| **Cash Flows from Investing Activities:**                                           |       |                                                                     |       |                                                                       |       |
| Expenditures for vessels                                                            |       | (40,087                                                                  | )          | (31,418                                                                    | )          |
| Net cash used in investing activities                                               |       | (40,087                                                                  | )          | (31,418                                                                    | )          |
|                                                                                |       |                                                                     |       |                                                                       |       |
| **Cash Flows from Financing Activities:**                                           |       |                                                                     |       |                                                                       |       |
| Proceeds from borrowings under revolving  credit facility                           |       | 78,000                                                                   |       | —                                                                     |       |
| Payments on debt and obligations under  capital leases                              |       | (32,331                                                                  | )          | (9,812                                                                     | )          |
| Cash distributions paid                                                             |       | (28,700                                                                  | )          | —                                                                     |       |
| Payments for initial public offering  transaction costs                             |       | (241                                                                     | )          | —                                                                     |       |
| Changes in advances from affiliates                                                 |       | 1,163                                                                    |       | 23,113                                                                     |       |
| Other                                                                               |       | (143                                                                     | )          | —                                                                     |       |
| Net cash provided by financing activities                                           |       | 17,748                                                                   |       | 13,301                                                                     |       |
| Net increase/(decrease) in cash and cash  equivalents                               |       | 29,715                                                                   |       | (45                                                                        | )          |
| Cash and cash equivalents at beginning of  period                                   |       | 3,380                                                                    |       | 280                                                                        |       |
| Cash and cash equivalents at end of period                                          |       | $                                                                        | 33,095     |                                                                       | $          | 235 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**OSG AMERICA L.P.**

**CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL**

**DOLLARS AND UNITS IN THOUSANDS**

**(UNAUDITED)**

 
| ** **                                                                   | ** ** | **Limited Partners** | ** ** | ** **                  | ** ** | **Accumulated  Other** | ** ** | ** **        | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                   | ** ** | **Common Units**     | ** ** | **Subordinated Units** | ** ** | **General**            | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | **Units**                 | ** ** | **Amount**                  | ** ** | **Units**              | ** ** | **Amount**        | ** ** | **Partner** | ** ** | **Income/(Loss)** | ** ** | **Total** | ** ** |
| Balance at December 31, 2007                                            |       | 15,002                    |       | $                           | 263,368    |                   | 15,000     |              | $          | 266,453 |   | $ | 10,876 |   | $ | — |   | $ | 540,697 |   |
| Net loss                                                                     |       | —                    |       | (494                        | )          | —                 |       | (494              | )          | (20 | ) | — |   | (1,008 | ) |
| Effect of derivative instruments                                             |       | —                    |       | —                      |       | —                 |       | —            |       | — |   | (609 | ) | (609 | ) |
| Comprehensive loss                                                           |       |                      |       |                        |       |                   |       |              |       |   |   |   |   | (1,617 | ) |
| Costs associated with issuance of units pursuant to initial public  offering |       | —                    |       | (241                        | )          | —                 |       | —            |       | — |   | — |   | (241 | ) |
| Amortization of restricted units awards                                      |       | —                    |       | 11                          |       | —                 |       | —            |       | — |   | — |   | 11 |   |
| Distributions to members                                                     |       | —                    |       | (14,064                     | )          | —                 |       | (14,062           | )          | (574 | ) | — |   | (28,700 | ) |
|                                                                         |       |                      |       |                        |       |                   |       |              |       |   |   |   |   |   |   |
| Balance at September 30, 2008                                           |       | 15,002                    |       | $                           | 248,580    |                   | 15,000     |              | $          | 251,897 |   | $ | 10,282 |   | $ | (609 | ) | $ | 510,150 |   |

 

Seenotes to condensed consolidated financial statements.

 

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

 

**Note A—Organization:**

 

OSGAmerica L.P., a Delaware limited partnership (the “Partnership”), was formed onMay 14, 2007 to ultimately own a 100% interest in OSG America OperatingLLC (the “Operating Company”). The Partnership’s general partner, OSG AmericaLLC (the “General Partner”), is a wholly owned indirect subsidiary of OverseasShipholding Group, Inc., a publicly traded company incorporated inDelaware. Overseas Shipholding Group, Inc. and/or its wholly ownedsubsidiary, OSG Bulk Ships, Inc., a New York corporation, are referred toherein as “OSG”.  The Partnershipobtained the equity of the Operating Company in connection with the initialpublic offering of its common units, which was consummated on November 15,2007.

 

Ator prior to the completion of the offering, the following transactionsoccurred:

 
| · |   | The  Partnership entered into a contribution agreement with OSG pursuant to which  OSG transferred to the Partnership all of the outstanding membership  interests of the 18 vessel subsidiaries that own the vessels in the  Partnership’s initial fleet and a 37.5% membership interest in Alaska Tanker  Company, LLC; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | OSG  assigned to the Partnership the agreements to bareboat charter, from  subsidiaries of American Shipping Company, six newbuild product carriers  upon delivery of those vessels;                                                                                                                                      |
| · |   | The  Partnership 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 issued to the General Partner a 2% general partner interest in  the Partnership and all of the Partnership’s incentive distribution rights,  which will entitle the General Partner to increasing percentages of the cash  the Partnership distributes in excess of $0.43125 per unit per quarter;       |
| · |   | The  Partnership issued 7,500,000 of its common units to the public representing a  24.5% limited partner interest in the Partnership; and                                                                                                                                                                                     |
| · |   | The  Partnership satisfied its obligation to reimburse OSG for approximately  $129,256,000 of capital expenditures incurred prior to the initial public  offering with the proceeds from the offering.                                                                                                                         |

 

Inaddition, at or prior to the completion of the offering, the Partnershipentered into the following agreements:

 
| · |   | a  management agreement with OSG Ship Management, Inc. (“OSGM”), a wholly  owned subsidiary of OSG, pursuant to which OSGM agreed to provide the  Partnership commercial and technical management services; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | an  administrative services agreement with OSGM, pursuant to which OSGM agreed to  provide the Partnership administrative services;                                                                                        |
| · |   | an  omnibus agreement with OSG, the General Partner and others, setting forth,  among other things:                                                                                                                        |
|   |   | ·                                                                                                                                                                                                                     | when  the Partnership and OSG may compete with each other; |
|   |   | ·                                                                                                                                                                                                                     | certain  rights of first offer on Jones Act tank vessels; |
|   |   | ·                                                                                                                                                                                                                     | the  grant to the Partnership of options to purchase the membership interests of  one or more subsidiaries of OSG that have entered into shipbuilding contracts  with Bender Shipbuilding & Repair Co., Inc. for six newbuild  articulated tug barges (“ATBs”); |
|   |   | ·                                                                                                                                                                                                                     | the  grant to the Partnership of options to acquire the membership interests of  one or more subsidiaries of OSG that have entered into agreements to bareboat  charter, from subsidiaries of Aker American Shipping, Inc., two newbuild  product carriers and two newbuild shuttle tankers, upon delivery of those vessels;  and |
| · |   | a  $200,000,000 senior secured revolving credit facility.                                                                                                                                                                  |
|        |        |                                                                                                                                                                                                                            |  |  |

 

**Note B — Summary of SignificantAccounting Policies:**

 

*Basis of Presentation and Description ofBusiness. *OSG America L.P. is engaged in providingmarine transportation services through the ownership and operation of a fleetof tankers and ATBs.  Of the 22 vesselsin the operating fleet as of September 30, 2008, 20 operate in the JonesAct trade and two operate in the international market under the U.S. flag whileparticipating in the Maritime Security Program. These two tankers are not eligible for Jones Act trading because theywere not built in the United States.  Themanagement of OSG America L.P. has determined that it operates in onereportable segment. In addition, OSG America L.P. owns a 37.5% ownershipinterest in a joint venture, Alaska Tanker Company, LLC.

 

Theaccompanying unaudited condensed consolidated and predecessor combinedcarve-out financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of RegulationS-X.  They do not include all of theinformation and footnotes required by generally accepted accountingprinciples.  In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included. Operating results for the three and nine 

 

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monthsended September 30, 2008 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2008.  The condensed consolidated financialstatements include the assets and liabilities of the Partnership and itswholly-owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation. Investments in 50% or less owned affiliated companies, in whichthe Partnership exercises significant influence, but is not the primarybeneficiary, are accounted for by the equity method.

 

Forthe three and nine months ended September 30, 2008, the condensedconsolidated financial statements of the Company and its wholly ownedsubsidiaries reflect operations in which the Company operated as an independentcompany. For the three and nine months ended September 30, 2007, thepredecessor combined carve-out financial statements presented herein have beencarved out of the financial statements of OSG using specificidentification.  In the preparation ofthe predecessor carve-out financial statements, general and administrativeexpenses were not identifiable as relating to the vessels. General and administrativeexpenses, consisting primarily of salaries and other employee related costs,office rent, legal and professional fees, and travel and entertainment wereallocated based on the Company’s proportionate share of OSG’s totalship-operating days for the period. Management believes these allocationsreasonably present the results of operations and cash flows of OSG AmericaPredecessor. However, the predecessor combined carve-out statements ofoperations and cash flows may not be indicative of those that would have beenrealized had OSG America Predecessor operated as an independent stand-aloneentity for the period presented. Had OSG America Predecessor operated as anindependent stand-alone entity, its results could have differed significantlyfrom those presented herein.

 

Theconsolidated balance sheet as of December 31, 2007 has been derived fromthe audited financial statements at that date, but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in the Partnership’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

*Vessels, deferred drydocking expenditures and otherproperty.*Vessels arerecorded at cost and are depreciated to their estimated salvage value on thestraight-line basis over the lives of the vessels, which range from 20 to25 years. Each vessel’s salvage value is equal to the product of itslightweight tonnage and an estimated scrap rate.  Effective January 1, 2008, thePartnership effected a change in estimate related to the estimated scrap ratefor substantially all of its barges and tankers from $150 per lightweight tonto $300 per lightweight ton. The resulting increase in salvage value wasapplied prospectively and will reduce depreciation by approximately $2,400,000for the year ending December 31, 2008. The change in accounting estimate decreased depreciation expenses by$582,000 and $1,746,000 for the three and nine months ended September 30,2008, respectively, and increased basic and diluted net income per unit by$0.02 and $0.06, respectively.

 

OnJune 25, 2008, the Partnership purchased the *Overseas New Orleans* and the *Overseas Philadelphia,* each of which had been previouslyoperated under capital leases. The useful lives of these vessels was determinedbased on their OPA retirement dates. In the third quarter of 2008, thePartnership effected a change in estimate related to the useful lives of itstwo remaining single hull tankers and extended their useful lives to matchtheir OPA retirement dates. As a result, depreciation expense decreased byapproximately $900,000 and basic and diluted net loss per unit decreased by$0.03 per unit in the quarter ended September 30, 2008.

 

*Newly Issued Accounting Standards***. **In December 2007, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 141 (revised 2007), “BusinessCombinations” (“FAS 141R”). FAS 141R establishes principles and requirementsfor how an acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquiree and the goodwill acquired. FAS 141R alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. FAS 141R appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  An entity may not apply FAS 141Rbefore that date.

 

InDecember 2007, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 160, “Noncontrolling Interests inConsolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51”(“FAS 160”). FAS 160 establishes accounting and reporting standardsfor ownership interests in subsidiaries held by parties other than the parent,the amount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. FAS 160 also establishes disclosure requirements that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. FAS 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008.  Earlier adoption is prohibited.This statement is required to be applied prospectively as of the beginning ofthe fiscal year in which it initially applied, except for the presentation anddisclosure requirements, which must be applied retrospectively for all periodspresented.

 

InMarch 2008, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of Statement of FinancialAccounting 

 

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StandardsNo. 133” (“FAS 161”).  FAS 161requires qualitative disclosures about an entity’s objectives and strategiesfor using derivatives and quantitative disclosures about how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. FAS 161 is effective for fiscal years, and interim periods within thosefiscal years, beginning after November 15, 2008, with early applicationallowed.  FAS 161 allows, but does notrequire, comparative disclosures for earlier periods at initial adoption.

 

InMarch 2008, the Emerging Issues Task Force reached a consensus on EITF07-4, “Application of the Two-Class Method under FASB Statement No. 128,Earnings per Share, to Master Limited Partnerships.” EITF 07-4 requires masterlimited partnerships with incentive distribution rights (“IDRs”), to measureearnings per unit as it relates to IDRs consistent with the two-class method ofmeasuring earnings per unit. This issue is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those fiscal years.

 

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

 

In the first quarter of 1999, OSG, BP Oil ShippingCompany USA, Inc. (“BP”) and Keystone Alaska, LLC formed Alaska TankerCompany, LLC (“ATC”) to manage the vessels carrying Alaskan crude oil for BP.ATC, 37.5% of which is owned by the Partnership, provides marine transportationservices in the environmentally sensitive Alaskan crude oil trade.  Each member of ATC is entitled to receive itsrespective share of any incentive charter hire payable by BP to ATC.  The Partnership is not the primarybeneficiary (as defined in FASB Interpretation 46(R) “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51”) with regardto ATC and accounts for its 37.5% interest in ATC according to the equitymethod.  The Partnership’s share of thenet income of ATC is classified as equity in income of affiliated companies inthe accompanying statements of operations.

 

A condensed summary of the results of operations of ATCfollows:

 
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **In thousands**            | ** ** | **2008**                                             | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Time charter equivalent revenues |       | $                                                    | 35,069     |                                                      | $          | 32,615 |   | $ | 103,524 |   | $ | 98,376 |   |
| Ship operating expenses          |       | (32,062                                              | )          | (29,955                                                   | )          | (96,187 | ) | (89,863 | ) |
|                             |       | $                                                    | 3,007      |                                                      | $          | 2,660 |   | $ | 7,337 |   | $ | 8,513 |   |

 

**Note D — Derivatives and Fair Value Disclosures:**

 

*Interest Rate Swaps*

 

Asof September 30, 2008, the Company is a party to forward startfloating-to-fixed interest rate swaps, which are being accounted for as cashflow hedges, with various major financial institutions covering notionalamounts aggregating $30,000,000 pursuant to which it pays fixed rates averaging4.35% and receives floating rates based on 3-month LIBOR (approximately 4.1% asof September 30, 2008). These swaps mature in 2012.  As of September 30, 2008, the Companyhas recorded a liability of $609,000 related to the fair values of these swaps.

 

Thefollowing table presents the fair values for liabilities measured on arecurring basis as of September 30, 2008:

 
| **In thousands****Description** | ** ** | **Fair Value** | ** ** | **Level 2:  Significant other  observable inputs** | ** ** |
|--------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------|------------|
| Liabilities:                         |       |                |       |                                                              |       |
| Interest rate swaps                  |       | $                   | 609        |                                                              | $          | 609 |   |
|                                      |            |                     |            |                                                                   |            |  |  |

 

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**Note E—Accounts Payable andAccrued Expenses:**

 

Accounts payable and accrued expenses consist of thefollowing:

 
| **In thousands**                | ** ** | **As of September 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| Trade payables                       |       | $                                                | 3,536      |                                            | $          | 4,533 |   |
| Fuel accruals                        |       | 1,954                                            |       | 3,544                                           |       |
| Charter revenues received in advance |       | 6,518                                            |       | 3,074                                           |       |
| Drydock                              |       | 2,798                                            |       | 2,523                                           |       |
| Insurance premiums                   |       | 275                                              |       | 2,253                                           |       |
| Payroll and benefits                 |       | 1,504                                            |       | 1,003                                           |       |
| Customs and duty                     |       | 2,197                                            |       | —                                          |       |
| Interest expense                     |       | 554                                              |       | 311                                             |       |
| Brokers commissions                  |       | 391                                              |       | 444                                             |       |
| Other                                |       | 994                                              |       | 1,837                                           |       |
|                                 |       | $                                                | 20,721     |                                            | $          | 19,522 |   |

 

**Note F—Advances from AffiliatedCompanies:**

 

Advances from affiliated companies represent thefunding of operating expenses pursuant to the Partnership’s management andadministrative agreements with OSGM and are non interest bearing.

 

**Note G—Long-term Debt:**

 

In November 2007, OSG America Operating CompanyLLC, a wholly owned subsidiary of the Partnership, entered into a $200,000,000,five-year senior secured revolving credit agreement. Borrowings under thisfacility bear interest at a rate based on LIBOR. The facility may be extendedby 24 months subject to approval by lenders. As of September 30, 2008,$78,000,000 was outstanding under the facility at a weighted average interestrate of 3.65%. The Partnership has $122,000,000 available under this facilityat September 30, 2008.

 

Borrowingsunder the senior secured revolving credit facility are secured by, among otherthings, first preferred mortgages on certain owned vessels, and are guaranteedby the Partnership and certain of its subsidiaries.

 

The senior secured revolving credit facility prevents the Partnershipfrom declaring or making distributions if any event of default, as defined inthe senior secured revolving credit agreement, exists or would result from suchpayments. In addition, the senior secured revolving credit facility containscovenants requiring the Partnership to adhere to certain financial covenants.  The Partnership was in compliance with all ofthe financial covenants contained in our debt agreements as of September 30,2008.

 

OnJune 25, 2008, the Partnership purchased the *Overseas New Orleans* and the *Overseas Philadelphia,* each of which had been previouslyoperated under capital leases, for a total of $30,923,000. This acquisition wasfunded with borrowings under the senior secured revolving credit facility.

 

Interestpaid, excluding loans to affiliates and capitalized interest, for the ninemonths ended September 30, 2008 and 2007 amounted to $3,655,000 and$3,856,000, respectively.

 

**Note H—Taxes:**

 

The components of the Predecessor’s provision forfederal income taxes follow:

 
| **In thousands** | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Nine Months Ended  September 30, 2007** | ** ** |
|-----------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Current               |       | $                                                              | (3,515     | )                                                             | $          | (23 | ) |
| Deferred              |       | 3,949                                                          |       | 1,681                                                         |       |
|                  |       | $                                                              | 434        |                                                          | $          | 1,658 |   |

 

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

 

**Note I — Leases:**

 

*Charters-in:*

 

Asof September 30, 2008, the Partnership had commitments to charter-in eightvessels from subsidiaries of American Shipping Company (“AMSC”) and to timecharter-in two vessels from OSG, all of which are, or will be, accounted for asoperating leases. Effective upon the completion of the OSG Constitution’sshipyard period in the fourth quarter of 2008, the *OSG Constitution/OSG 400*’s time charter agreement with OSGwill convert to a bareboat charter agreement.

 

Thefuture minimum commitments and related number of operating days under theoperating leases are as follows:

 

BareboatCharters:

 
| ** **                         | ** ** | **As of September 30, 2008** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **Dollars in thousands** | ** ** | **Amount**                                       | ** ** | **Operating Days** | ** ** |
| 2008                               |       | $                                                | 9,639      |   | 460 |   |
| 2009                               |       | 51,791                                           |       | 2,378 |   |
| 2010                               |       | 61,539                                           |       | 2,787 |   |
| 2011                               |       | 64,331                                           |       | 2,920 |   |
| 2012                               |       | 64,306                                           |       | 2,928 |   |
| Thereafter                         |       | 150,286                                          |       | 5,228 |   |
| Total                              |       | $                                                | 401,892    |   | 16,701 |   |

 

Bareboatcharters from OSG:

 
| ** **                         | ** ** | **As of September 30, 2008** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **Dollars in thousands** | ** ** | **Amount**                                       | ** ** | **Operating Days** | ** ** |
| 2008                               |       | $                                                | 794        |   | 69 |   |
| 2009                               |       | 4,151                                            |       | 361 |   |
| Total                              |       | $                                                | 4,945      |   | 430 |   |

 

Timecharters from OSG:

 
| ** **                         | ** ** | **As of September 30, 2008** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **Dollars in thousands** | ** ** | **Amount**                                       | ** ** | **Operating Days** | ** ** |
| 2008                               |       | $                                                | 550        |   | 22 |   |
| 2009                               |       | —                                           |       | — |   |
| Total                              |       | $                                                | 550        |   | 22 |   |

 

InJune 2005, OSG signed agreements to bareboat charter in ten Jones ActProduct Tankers to be constructed by Aker Philadelphia Shipyard, Inc. (“APSI”).The order was increased to 12 ships in October 2007. Agreements for eightof such vessels are included in the Partnership. Following construction, APSI willsell the vessels to leasing subsidiaries of AMSC, which will charter the eightvessels to the Partnership for initial terms of five or seven years. ThePartnership has extension options for the lives of the vessels. The chartersprovide for profit sharing with the owners of the vessels when revenues earnedby such vessels exceed amounts defined in the charters. Five of these vessels**have delivered from the shipyard asfollows:

 

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| **Vessel**            | ** ** | **Delivery  Date**  |
|-----------------------|------------|---------------------|
| Overseas  Houston     |       | February 2007  |
| Overseas  Long Beach  |       | June 2007      |
| Overseas Los  Angeles |       | November 2007  |
| Overseas New  York    |       | April 2008     |
| Overseas  Texas City  |       | September 2008 |

 

Theremaining three vessels are scheduled to be delivered from the shipyard betweenearly 2009 and early 2010. The bareboat charters will commence upon delivery ofthe vessels.

 

*Charters-out:*

 

Thefuture minimum revenues, before reduction for brokerage commissions, expectedto be received on noncancelable time charters and the related revenue days(revenue days represent calendar days less days vessels are not available foremployment due to repairs, drydock or lay-up) are as follows:

 
| ** **                         | ** ** | **As of September 30, 2008** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **Dollars in thousands** | ** ** | **Amount**                                       | ** ** | **Operating Days** | ** ** |
| 2008                               |       | $                                                | 41,870     |   | 1,088 |   |
| 2009                               |       | 141,986                                          |       | 3,323 |   |
| 2010                               |       | 124,158                                          |       | 2,638 |   |
| 2011                               |       | 108,326                                          |       | 2,203 |   |
| 2012                               |       | 63,199                                           |       | 1,298 |   |
| Thereafter                         |       | 66,144                                           |       | 1,393 |   |
| Total                              |       | $                                                | 545,683    |   | 11,943 |   |

 

Timecharters to OSG:

 
| ** **                         | ** ** | **As of September 30, 2008** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **Dollars in thousands** | ** ** | **Amount**                                       | ** ** | **Operating Days** | ** ** |
| 2008                               |       | $                                                | 8,054      |   | 273 |   |
| 2009                               |       | 42,343                                           |       | 1,413 |   |
| Total                              |       | $                                                | 50,397     |   | 1,686 |   |

 

Revenuesfrom a time charter are generally not received when a vessel is off-hire, whichincludes time required for normal periodic maintenance of the vessel. Inarriving at the minimum future charter revenues, an estimated time off-hire toperform periodic maintenance on each vessel has been deducted, although thereis no assurance that such estimate will be reflective of the actual off-hire inthe future.  The scheduled future minimumrevenues should not be construed to reflect total shipping revenues for any ofthe periods.

 

**Note J—Pension Plans:**

 

ThePartnership makes contributions to jointly managed (company and union)multi-employer pension plans covering seagoing personnel. Certain otherseagoing personnel are covered under a defined contribution plan, the cost ofwhich is funded as incurred. The costs of these plans were not material for thenine months ended September 30, 2008 and 2007.

 

**Note K — Commitments:**

 

Asof September 30, 2008, the Partnership had remaining commitments of$7,850,000 on non-cancelable contracts for the construction of two tugs to bedelivered in 2009. The Partnership expects these commitments to be funded fromexisting cash on hand, borrowings under the senior secured revolving creditfacility or additional long-term debt as required.

 

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**Note L — Impairment of Vessel:**

 

Duringthe third quarter of 2008, the Partnership decided to forego the scheduleddrydocking of one of the older product carriers which is a requirement for herto continue in operations.  The vesselwill cease operations and will be placed in lay-up during the fourth quarter of2008 pending her sale. Accordingly, the Partnership recorded a charge of$19,319,000 to write down her carrying amount to her estimated net fair valueas of September 30, 2008. This vessel has been classified as held for saleat September 30, 2008.

 

**Note M — Related Party Transactions:**

 

EffectiveApril 1, 2008, the Partnership entered into time charter agreements withOSG to charter-out five vessels, three of which were employed by thePartnership in the spot market (two ATBs, the *OSGColumbia/OSG 242* and the *OSGIndependence/OSG 243*, and one product carrier, the *Overseas New Orleans)*and two productcarriers (the *Overseas Philadelphia*and *Overseas Puget Sound*) uponthe completion of their current time charters in 2009.  All five of these charter-out agreements areat fixed daily rates for terms commencing either on April 1, 2008 or uponthe expiry of such vessel’s then current charter and ending on or about December 31,2009.  Management believes that the fixeddaily rates in the charter-out agreements are at rates that approximateexisting market rates.

 

Alsoeffective April 1, 2008, the Partnership entered into a time charteragreement with OSG for the charter-in of the *Liberty/M300*and the *OSG Constitution/OSG 400*,which are two ATBs currently working in the Delaware Bay lightering business,at fixed daily rates.  The agreementassigns the charter contracts on these two ATBs to the Partnership.  The terms of each of the charters endsimultaneously with the completion of each unit’s lightering service, which isexpected to occur in 2008 for the *Liberty/M300*and 2009 for the *OSGConstitution/OSG 400*.

 

OnOctober 10, 2008, the Partnership converted the time charter agreementwith OSG on the *OSG Constitution/OSG 400*to a bareboat charter agreement. The bareboat charter commences upon thecompletion of the *OSG Constitution’s*shipyard period in the fourth quarter of 2008.

 

**Note N — Subsequent Events:**

 

OnOctober 23, 2008, the Board of Directors of OSG America LLC, declared aquarterly distribution to all unitholders in the amount of $0.375 per unit forthe three months ended September 30, 2008. The distribution of approximately $11,500,000 will be paid on November 13,2008 to unitholders of record on November 3, 2008.

 

OnOctober 10, 2008, OSG purchased 500,435 of OSP’s common units based on anunsolicited inquiry from a unitholder. OSG currently owns a 77.1% interest in the Partnership.

 

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

 

**FORWARD-LOOKING STATEMENTS**

 

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

 

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

 

· our ability tomake cash distributions on the units;

 

· planned capitalexpenditures and availability of capital resources to fund capitalexpenditures;

 

·delays or cost overruns in the building of new vessels and scheduled shipyardmaintenance;

 

· future supplyof, and demand for, oil and refined petroleum products either globally or inparticular regions;

 

· risks inherentin marine transportation and vessel operation, including accidents anddischarge of pollutants;

 

· the cost andavailability of insurance coverage;

 

· reliance on alimited number of customers for revenue;

 

· future spotmarket charter rates;

 

· competitionthat could affect our market share and revenues;

 

·potential reductions in the supply of tank vessels due to restrictions set forthby the Oil Pollution Act of 1990 (“OPA 90”);

 

· continuation offederal laws restricting U.S. point to point maritime shipping to U.S. vessels;

 

· changes indomestic refined petroleum product consumption;

 

· changes in U.S.refining capacity;

 

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

 

· our ability tomaintain long-term relationships with our customers;

 

· expectedfinancial flexibility to pursue acquisitions and other expansion opportunities;

 

· our expectedcost of complying with OPA 90;

 

· estimatedfuture maintenance capital expenditures;

 

· our ability toattract and retain experienced, qualified and skilled crewmembers;

 

· expected demandin the domestic tank vessel market in general and the demand for our tankvessels in particular;

 

· changes in thedemand for lightering services;

 

· customers’increasing emphasis on environmental and safety concerns;

 

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

 

· our businessstrategy and other plans and objectives for future acquisitions/operations.

 

*These forward-looking statements are made based uponmanagement’s current plans, expectations, estimates, assumptions and beliefs concerningfuture events impacting us and therefore involve a number of risks anduncertainties. We caution that forward-looking statements are not guaranteesand that actual results could differ materially from those expressed or impliedin the forward-looking statements. Please read “Risk Factors” in Item 1A. ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2007, for a list of important factors that could cause our actual results ofoperations or financial condition to differ from the expectations reflected inthese forward-looking statements.*

 

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**Overview**

 

Weare the largest operator, based on barrel-carrying capacity, of U.S. flagvessels transporting refined petroleum products. We were recently formed byOverseas Shipholding Group, Inc., a market leader in providing globalenergy transportation services. We plan to use the expertise, customer base andreputation of OSG to expand our marine transportation service.

 

OnNovember 15, 2007, upon completion of our initial public offering, OSGcontributed to us entities owning or operating a fleet of ten product carriers,seven articulated tug barges (“ATBs”) and one conventional tug/barge unit, withan aggregate carrying capacity of approximately 4.9 million barrels. OSGalso contributed to us a 37.5% ownership interest in Alaska Tanker Company,LLC, (“ATC”) a joint venture that transports crude oil from Alaska to thecontinental United States and which employs a fleet of five crude-oil tankers.As of September 30, 2008, OSG owned a 75.5% interest in us, including a 2%interest through our general partner, which OSG owns and controls. Ourmembership interests in our operating subsidiaries represent our onlycash-generating assets.

 

Ourmarket is protected from direct foreign competition by the Merchant Marine Actof 1920 (“Jones Act”), which mandates that all vessels transporting cargobetween U.S. ports must be built in the United States, registered under theU.S. flag, manned by U.S. crews and owned and operated by U.S. organizedcompanies that are controlled and at least 75% owned by U.S. citizens. Twentyof the 22 vessels in our operating fleet at September 30, 2008 areoperated in the U.S. coastwise trade in accordance with the Jones Act and allof our future scheduled newbuild deliveries will qualify to operate under theJones Act.

 

**Overview—OSG America Predecessor**

 

Forthe three and nine months ended September 30, 2007, the combined financialstatements presented herein have been carved out of the consolidated financialstatements of OSG. Our financial position, results of operations and cash flowsreflected in our combined financial statements are not indicative of those thatwould have been achieved had we operated as an independent stand-alone entityfor all periods presented or of future results.

 

Tothe extent that assets, liabilities, revenues and expenses relate to the OSGAmerica Predecessor (“Predecessor”), they have been identified and carved outof OSG for inclusion in our combined financial statements. OSG’s other assets,liabilities, revenues and expenses that do not relate to the vessel interestsare not included in our combined financial statements. In addition, thepreparation of our combined carve-out financial statements required theallocation of certain expenses where these items were not identifiable asrelated to OSG America Predecessor.

 

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

 

Allof the companies included in the Predecessor combined carve-out financialstatements have been included in the OSG consolidated group for U.S. income taxpurposes for periods through November 14, 2007. The Predecessor financialstatements have been prepared on the basis that OSG was responsible for alltaxes related to periods prior to January 1, 2002. The provision forincome taxes in the Predecessor’s combined financial statements has beendetermined on a separate-return basis for all periods presented.

 

**Future Business**

 

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

 

InJune 2005, OSG signed agreements to bareboat charter-in ten Jones Act productcarriers from subsidiaries of American Shipping Company (“AMSC”). In February 2007,OSG agreed in principle to charter up to six additional Jones Act productcarriers, which eventually resulted in OSG concluding agreements to charter twovessels. The charters on eight of these twelve vessels have been assigned tous. We have committed to charter five of the eight vessels for initial terms ofseven years and the other three vessels for initial terms of five years. Wehave extension options for the remaining lives of these vessels. Five of thesevessels have delivered from the shipyard as follows:

 

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| **Vessel**            | ** ** | **Delivery  Date**  |
|-----------------------|------------|---------------------|
| Overseas  Houston     |       | February 2007  |
| Overseas  Long Beach  |       | June 2007      |
| Overseas  Los Angeles |       | November 2007  |
| Overseas  New York    |       | April 2008     |
| Overseas  Texas City  |       | September 2008 |

 

Theremaining three vessels that we have committed to bareboat charter arescheduled to be delivered from the shipyard between early 2009 and early 2010.

 

Wehave options to purchase from OSG up to six ATBs, to be constructed by BenderShipbuilding & Repair Co., Inc. The delivery dates of these ATBshave been delayed and we continue to work with the shipyard to resolve thesedelays. The ATBs are currently scheduled for delivery between early 2009 andlate 2010. We also have options to acquire from OSG the right to bareboatcharter up to four of the remaining newbuild vessels to be constructed by AkerPhiladelphia Shipyard Inc., scheduled for delivery between 2010 and early 2011.

 

OnJune 25, 2008, the Partnership purchased the *Overseas New Orleans* and the *Overseas Philadelphia,* each of which had been previouslyoperated under capital leases, for a total of $30.9 million. This acquisitionwas funded with borrowings under our senior secured revolving credit facility.

 

**Update on Critical Accounting Policies**

 

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”), which require us to makeestimates in the application of our accounting policies based on the bestassumptions, judgments and opinions of management. For a description of all ofour material accounting policies, see Note B to our consolidated financialstatements included in our Annual Report on Form 10-K for the year ended December 31,2007.

 

***Vessel Lives and Impairment***

 

Thecarrying value of each of our vessels represents its original cost at the timeit was delivered or purchased less depreciation calculated using an estimateduseful life of 25 years from the date that such vessel was originallydelivered from the shipyard or 20 years from the date our ATBs wererebuilt.  Effective January 1, 2008,we effected a change in estimate related to the estimated scrap rate forsubstantially all of our barges and tankers from $150 per lightweight ton to$300 per lightweight ton.  The resultingincrease in salvage value will reduce depreciation by approximately $2.4million for the year ending December 31, 2008 and by approximately $0.6million for each quarter in 2008.  Theassumptions used in the determination of estimated salvage value took intoaccount then current scrap prices, which were in excess of $700 per lightweightton, the historic pattern of scrap rates over the four years ended December 31,2007, which ranged from $250 to over $500 per lightweight ton, estimatedchanges in future market demand for scrap steel and estimated future demand forvessels.  Although management believesthat the assumptions used to determine the scrap rate are reasonable andappropriate, such assumptions are highly subjective, in part, because of thecyclicality of the nature of future demand for scrap steel.

 

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

 

Indeveloping estimates of future cash flows, we must make assumptions aboutfuture charter rates, ship operating expenses, and the estimated remaininguseful lives of the vessels.  Theseassumptions are based on historical trends as well as future expectations.  Although management believes that theassumptions used to evaluate potential impairment are reasonable andappropriate, such assumptions are highly subjective.

 

Duringthe third quarter of 2008, we decided to forego the scheduled drydocking of oneof our older product carriers which is a requirement for her to continue inoperations.  The vessel will ceaseoperations and will be placed in lay-up during the fourth quarter of 2008pending her sale.  Accordingly, werecorded a charge of $19.3 million to write down the carrying 

 

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amountof this vessel to her estimated net fair value as of September 30, 2008and have classified this vessel as held for sale at September 30, 2008.

 

OnJune 25, 2008, the Partnership purchased the *Overseas New Orleans* and the *Overseas Philadelphia,* each of which had been previouslyoperated under capital leases. The useful lives of these vessels was determinedbased on their OPA retirement dates. In the third quarter of 2008, thePartnership effected a change in estimate related to the useful lives of itstwo remaining single hull tankers and extended their useful lives to matchtheir OPA retirement dates. As a result, depreciation expense decreased byapproximately $0.9 million and basic and diluted net loss per unit decreased by$0.03 per unit in the quarter ended September 30, 2008.

 

***Goodwill and Intangible Assets***

 

Wetest the goodwill in each of our reporting units for impairment at leastannually, or more frequently if impairment indicators arise in accordance withFAS No. 142, “Goodwill and Other Intangible Assets,” by comparing ourestimated fair value with our estimated net book value. Considering the generalweakening of the economic outlook and the decline in the financial and bankingsectors, we performed an impairment test as of September 30, 2008.  We derive fair value primarily based ondiscounted cash flow models.  The processof evaluating the potential impairment of goodwill and intangible assets ishighly subjective and requires significant judgment with respect to estimatesof future cash flows expected to be generated and the appropriate discount rateto value these cash flows.  No impairmentof goodwill has been recorded during any of the periods presented.

 

***Newly Issued Accounting Standards***

 

InDecember 2007, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 141 (revised 2007), “BusinessCombinations” (“FAS 141R”). FAS 141R establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired.FAS 141R also establishes disclosure requirements to enable the evaluationof the nature and financial effects of the business combination. FAS 141Rapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008.  Anentity may not apply FAS 141R before that date.

 

InDecember 2007, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 160, “Noncontrolling Interests inConsolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51”(“FAS 160”). FAS 160 establishes accounting and reporting standardsfor ownership interests in subsidiaries held by parties other than the parent,the amount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. FAS 160 also establishes disclosure requirements thatclearly identify and distinguish between the interests of the parent and theinterests of the noncontrolling owners. FAS 160 is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008.  Earlier adoption is prohibited.This statement is required to be applied prospectively as of the beginning ofthe fiscal year in which it initially applied, except for the presentation anddisclosure requirements, which must be applied retrospectively for all periodspresented.

 

InMarch 2008, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of Statement of FinancialAccounting Standards No. 133” (“FAS 161”). FAS 161 requires qualitative disclosures about an entity’s objectivesand strategies for using derivatives and quantitative disclosures about howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. FAS 161 is effective for fiscal years, and interim periods within thosefiscal years beginning after November 15, 2008, with early applicationallowed.  FAS 161 allows, but does notrequire, comparative disclosures for earlier periods at initial adoption.

 

InMarch 2008, the Emerging Issues Task Force reached a consensus on EITF07-4, “Application of the Two-Class Method under FASB Statement No. 128,Earnings per Share, to Master Limited Partnerships.” EITF 07-4 requires masterlimited partnerships with incentive distribution rights (“IDRs”), to measureearnings per unit as it relates to IDRs consistent with the two-class method ofmeasuring earnings per unit. This issue is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those fiscal years.

 

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***Industry Overview***

 

The table that follows shows the daily TCE rates thatprevailed 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 alist of calculated (or flat) rates for specific voyage itineraries for astandard vessel, as defined.  Theconversion of AR rates to the following TCE rates required us to make certainassumptions as to brokerage commissions, port time, port costs, speed and fuelconsumption, all of which will vary in actual usage. In each case, the ratesmay differ from the actual TCE rates achieved by us in the period indicatedbecause of the timing and length of voyages and the portion of revenuegenerated from long-term charters.

 

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

 
| ** **                  | ** ** | **Average Spot Market TCE Rates for Jones Act Product Carriers and   Articulated Tug/Barges (ATBs)** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Three Months Ended September 30,**                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                  | ** ** | **2008**                                                                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| 40,000 dwt Product Carriers |       | $                                                                                                    | 39,700     |   | $ | 51,100 |   | $ | 57,500 |   | $ | 52,900 |   |
| 30,000 dwt ATBs             |       | $                                                                                                    | 23,900     |   | $ | 33,200 |   | $ | 37,400 |   | $ | 34,200 |   |

 

During the third quarter of 2008, rates for Jones ActProduct Carriers and handysize ATBs averaged $39,700 per day and $23,900 perday, respectively. Rates for the product carriers and ATBs were 22% and 28%,respectively, lower than the third quarter of 2007.

 

The lower third quarter of 2008 rates reflected a reduction in U.S.Gulf Coast refining utilization rates from 90.6% in the third quarter of 2007to 76.6% in the third quarter of 2008. This was primarily due to hurricanesthat hit the U.S. Gulf Coast curtailing gasoline output at Gulf Coastrefineries by approximately 1.2 million barrels per day compared withpre-hurricane levels. Lower refining utilization rates reduced productshipments from the Gulf Coast in the third quarter of 2008. Six vesselsoperating in the Jones Act market were used to transport grain in the thirdquarter somewhat offsetting the decrease in gasoline shipments.

 

TheDelaware Bay lightering business transported an average of 238,000 barrels perday during the quarter, which was at a similar level compared with the thirdquarter of 2007 but 6% lower than the second quarter 2008 volumes. U.S. EastCoast refinery utilization was 80% in the third quarter of 2008 compared with87% in the third quarter of 2007. Refinery utilization in the third quarter of2008 was lower than the second quarter of 2008 due to customer refinery issuesand delays caused by Hurricane Hannah.

 

Twonew vessels, including our newly built tanker, the *Overseas Texas City*, were delivered during the third quarterof 2008. No conversions or scrappings were reported. As of September 30,2008, the total Jones Act Product Carrier fleet of tankers, ATBs and ITBsconsisted of 66 vessels, or 2.6 million dwt. Approximately 39% of the fleet,based on dwt, is not double hulled and will be phased out during the next nineyears in accordance with the OPA regulations. The Jones Act Product Carrierorderbook at September 30, 2008 consisted of 30 tankers and barges in the160,000 to 420,000 barrel size range, which are scheduled for delivery through2012.

 

Freightrates remain highly sensitive to an over supply in spot tonnage, severe weatherand geopolitical and economic events. Spot market tonnage has increased due to redeliveries of older, nondouble hull vessels in response to the on time deliveries of the first fiveproduct carriers from Aker. Additionally, hurricanes in the Gulf of Mexicocould have a pronounced effect on freight rates for both crude oil and productmovements depending on the extent to which upstream and downstream facilitiesare affected.

 

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**Income from Vessel Operations**

 

*Time Charter Equivalent Revenues*

 

Thefollowing table reconciles TCE revenues to shipping revenues, as reported inthe consolidated and combined statements of operations:

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **In thousands** | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| TCE Revenues          |       | $                                                    | 63,703     |                                                | $          | 48,304 |   | $ | 176,025 |   | $ | 132,560 |   |
| Voyage Expenses       |       | 10,509                                               |       | 7,480                                               |       | 33,447 |   | 22,324 |   |
| Shipping Revenues     |       | $                                                    | 74,212     |                                                | $          | 55,784 |   | $ | 209,472 |   | $ | 154,884 |   |

 

Consistentwith general practice in the shipping industry, we use TCE revenues, whichrepresent shipping revenues less voyage expenses, as a measure to comparerevenues generated from voyage charters to revenues generated from timecharters. TCE revenues, a non-U.S. GAAP measure, provides additional meaningfulinformation in conjunction with shipping revenues, the most directly comparableU.S. GAAP measure, because it assists management in making decisions regardingthe deployment and use of our vessels and in evaluating their financialperformance.

 

Thefollowing table provides information with respect to average daily TCE ratesearned and revenue days for the three and nine months ended September 30,2008 and 2007:

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue Days:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Jones Act ATBs                 |       | 776                                                  |       | 525                                                 |       | 2,172 |   | 1,720 |   |
| Jones Act Product Carriers     |       | 906                                                  |       | 695                                                 |       | 2,496 |   | 1,782 |   |
| Non-Jones Act Product Carriers |       | 184                                                  |       | 179                                                 |       | 484 |   | 535 |   |
|                           |       | 1,866                                                |       | 1,399                                               |       | 5,152 |   | 4,037 |   |
|                           |       |                                                 |       |                                                |       |   |   |   |   |
| Average Daily TCE Rates:       |       |                                                 |       |                                                |       |   |   |   |   |
| Jones Act ATBs                 |       | $                                                    | 30,227     |                                                | $          | 33,859 |   | $ | 31,713 |   | $ | 28,359 |   |
| Jones Act Product Carriers     |       | $                                                    | 35,212     |                                                | $          | 37,239 |   | $ | 34,597 |   | $ | 35,872 |   |
| Non-Jones Act Product Carriers |       | $                                                    | 45,353     |                                                | $          | 25,961 |   | $ | 42,957 |   | $ | 37,120 |   |

 

EffectiveApril 1, 2008, we entered into time charter agreements with OSG for thecharter-in of the *Liberty/M300*and the *OSG Constitution/OSG 400*,which are two ATBs currently working in the Delaware Bay lightering business,at fixed daily rates.  The agreementassigns the charter contracts on these two ATBs to us.  On October 10, 2008, the Partnershipconverted the time charter agreement with OSG on the *OSG Constitution/OSG 400* to a bareboat charter agreement.The bareboat charter commences upon the completion of the*OSG Constitution’s* shipyard period in thefourth quarter of 2008. The term of the bareboat charter ends simultaneouslywith the completion of the unit’s lightering service, which is expected tooccur in 2009.

 

TCErevenues increased $15.4 million, or 32%, from $48.3 million for the threemonths ended September 30, 2007 to $63.7 million for the three monthsended September 30, 2008. The increase in TCE revenues resulted primarilyfrom a net increase of 467 revenue days in the three months ended September 30,2008 compared with the same period in 2007. These additional days wereattributable to the delivery of the *OverseasLos Angeles* and the *Overseas NewYork* in November 2007 and April 2008, respectively, whichadded 184 revenue days the third quarter of 2008 compared with the same quarterin 2007.  On February 20, 2007, thebarge *M211*, was taken out ofservice and entered the shipyard for her double hull conversion.  She re-entered service on April 24,2008, renamed the *OSG 243*, adding91 revenue days to the three months ended September 30, 2008 compared withthe same period in 2007. The addition of the *Liberty/M300*and the *OSG Constitution/OSG 400*charter contracts, discussed above, added 103 revenue days to the three monthsended September 30, 2008 compared with the same period in 2007.

 

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TCErevenues increased $43.4 million, or 33%, from $132.6 million for the ninemonths ended September 30, 2007 to $176.0 million for the nine monthsended September 30, 2008. The increase in TCE revenues resulted primarilyfrom a net increase of 1,115 revenue days in the nine months ended September 30,2008 compared with the same period in 2007. These additional days wereattributable primarily to the delivery of the Aker tankers, discussed in FutureBusiness above, which added 691 revenue days in 2008 compared with the sameperiod in 2007. In the nine months ended September 30, 2007, the barge *OSG 242* was in the shipyard being rebuiltto a double hull configuration.  Herreturn to service added 103 revenue days to the nine months ended September 30,2008 compared with the nine months ended September 30, 2007.  The addition of the *Liberty/M300* and the *OSG Constitution/OSG 400* chartercontracts, discussed above, added 252 revenue days to the nine months ended September 30,2008 compared with the same period in 2007.

 

*Vessel Expenses*

 

Thefollowing table provides information with respect to average daily vesselexpenses and operating days for the three and nine months ended September 30,2008 and 2007:

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating Days:                |       |                                                 |       |                                                |       |   |   |   |   |
| Jones Act ATBs                 |       | 840                                                  |       | 736                                                 |       | 2,444 |   | 2,184 |   |
| Jones Act Product Carriers     |       | 931                                                  |       | 736                                                 |       | 2,650 |   | 1,968 |   |
| Non-Jones Act Product Carriers |       | 184                                                  |       | 184                                                 |       | 548 |   | 546 |   |
|                           |       | 1,955                                                |       | 1,656                                               |       | 5,642 |   | 4,698 |   |
|                           |       |                                                 |       |                                                |       |   |   |   |   |
| Average Daily Vessel Expenses: |       |                                                 |       |                                                |       |   |   |   |   |
| Jones Act ATBs                 |       | $                                                    | 8,333      |                                                | $          | 9,213 |   | $ | 8,099 |   | $ | 8,277 |   |
| Jones Act Product Carriers     |       | $                                                    | 17,878     |                                                | $          | 18,711 |   | $ | 17,265 |   | $ | 17,168 |   |
| Non-Jones Act Product Carriers |       | $                                                    | 11,304     |                                                | $          | 18,223 |   | $ | 13,358 |   | $ | 14,932 |   |
|                           |       |                                                 |       |                                                |       |   |   |   |   |

 

Vesselexpenses increased $1.0 million, or 4%, from $23.9 million for the three monthsended September 30, 2007 to $24.9 million for the three months ended September 30,2008.  The increase in vessel expensesresulted primarily from a net increase of 299 operating days in the threemonths ended September 30, 2008 compared with the same period in 2007.These additional days were attributable to the delivery of the Aker tankers,discussed in Future Business above, which added 196 operating days in 2008compared with the same period in 2007. Operating days also increased due to areduction in out-of-service days due to drydockings and from the addition ofthe *Liberty/M300* and the *OSG Constitution/OSG 400* chartercontracts, which added 104 days during the quarter. These days are excluded incalculating daily vessel expenses. We also recognized higher crew wages in 2008compared with the 2007 period.

 

Vesselexpenses increased $10.8 million, or 18%, from $60.0 million for the ninemonths ended September 30, 2007 to $70.8 million for the nine months endedSeptember 30, 2008.  The increase invessel expenses resulted primarily from a net increase of 944 operating days inthe nine months ended September 30, 2008 compared with the same period in2007. These additional days were attributable to the delivery of the Akertankers, discussed in Future Business above, which added 676 operating days in2008 compared with the same period in 2007. Operating days also increased 252days from the addition of the *Liberty/M300*and the *OSG Constitution/OSG 400*charter contracts. We also recognized higher crew wages in 2008 compared withthe 2007 period.

 

*Charter Hire Expenses*

 

Charterhire expenses increased $6.5 million from $4.9 million for the three monthsended September 30, 2007 to $11.4 million for the three months ended September 30,2008. Charter hire expenses increased $22.3 million from $7.9 million for thenine months ended September 30, 2007 to $30.2 million for the nine monthsended September 30, 2008. The deliveries of the Aker tankers, discussed inFuture Business above, resulted in an additional 196 and 676 days of charterhire expense in the three and nine months ended September 30, 2008,respectively. In addition, we recognized $1.8 million and $4.7 million ofcharter hire expense in the three and nine months ended September 30,2008, respectively, as a result of the *Liberty/M300*and *OSG Constitution/OSG 400*charter contracts, discussed above.

 

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*Depreciation and Amortization*

 

Depreciationand amortization increased $0.7 million, or 5%, from $12.2 million for thethree months ended September 30, 2007 to $12.9 million for the threemonths ended September 30, 2008. Depreciation and amortization increased$4.9 million, or 14%, from $34.7 million for the nine months ended September 30,2007 to $39.6 million for the nine months ended September 30, 2008. Theincrease in both periods was primarily due to the amortization of costsincurred on vessels in the former Maritrans fleet that drydocked for the firsttime since the November 2006 acquisition, partially offset by a decreaseof approximately $0.6 million and $1.8 million for the three and nine monthsended September 30, 2008, respectively, as a result of the change insalvage value of the vessels. In addition, the extension of the useful lives ofour remaining single hull tankers to match their OPA retirement dates inconnection with the purchase of the *OverseasNew Orleans* and the *OverseasPhiladelphia,* reduced depreciation expense by $0.9 million in thethree and nine months ended September 30, 2008. Depreciation andamortization for each of the three months ended September 30, 2008 and2007 includes $1.2 million and for each of the nine months ended September 30,2008 and 2007 includes $3.5 million related to the amortization of intangibles resultingfrom the acquisition of Maritrans.

 

*General and Administrative Expenses*

 

Generaland administrative expenses decreased $0.9 million, or 16%, from $5.8 millionfor the three months ended September 30, 2007 to $4.9 million for thethree months ended September 30, 2008. General and administrative expensesof $15.9 million for the nine months ended September 30, 2008 werecomparable with the nine months ended September 30, 2007. Prior to November 14,2007, general and administrative expenses were allocated based on our fleet’sproportionate share of OSG’s total ship-operating (calendar) days. For thethree and nine months ended September 30, 2007, ship-operating days were1,656 and 4,698 days, respectively. Management believes that such allocationreasonably presents the results of operations and cash flows of OSG AmericaPredecessor for the period ended September 30, 2007. General andadministrative expenses for the three and nine months ended September 30,2008 reflect actual expenses incurred.

 

*Equity in Income of Affiliated Companies*

 

Ona quarterly basis, we recognize our share of the estimated incentive charterhire that has been deemed earned through the reporting date that is notreversible subsequent thereto.  ATC fullydistributes its net income for each year by making a distribution in the firstquarter of the following year.  Theportion of incentive hire that is based on annual targets is not recognizeduntil the fourth quarter when deemed earned. Equity in income of affiliatedcompanies increased by $0.2 million, or 21%, from $0.9 million for the threemonths ended September 30, 2007 to $1.1 million for the 2008 period.Equity in income of affiliated companies decreased by $0.4 million, or 14%,from $3.2 million for the nine months ended September 30, 2007 to $2.8million for the nine months ended September 30, 2008. The year-to-datedecrease was attributable to a decrease in the quarterly incentive hire rateearned by ATC in 2008 compared with 2007.

 

*Interest Expense, other*

 

Interestexpense on third party obligations of $1.3 million for the three months ended September 30,2008 was comparable with the three months ended September 30, 2007.Interest expense on third party obligations increased $0.4 million, or 9%, from$3.8 million for the nine months ended September 30, 2007 to $4.2 millionfor the nine months ended September 30, 2008. A decrease in interestexpense incurred with respect to secured term loans due to normal amortizationwas offset by interest incurred on borrowings under the senior securedrevolving credit facility totaling $0.7 million and $1.4 million for the threeand nine months ended September 30, 2008, respectively. Interest expenseis net of $0.3 million capitalized in connection with vessel construction foreach of the three months ended September 30, 2008 and 2007. Interestexpense for the nine months ended September 30, 2008 and 2007 is net of$0.9 million and $1.2 million, respectively, capitalized in connection withvessel construction.  On June 25,2008, the Partnership purchased the *OverseasNew Orleans* and the *OverseasPhiladelphia,* which had been previously operated under capitalleases, for a total of $30.9 million. This acquisition was funded withborrowings under the senior secured revolving credit facility and will reduceinterest expense in periods subsequent to June 30, 2008.

 

*Provision for Federal Income Taxes*

 

Asa result of our initial public offering as a partnership, we are not a taxableentity and will incur no federal income tax liability.  Instead, each unitholder will be required totake into account his or her share of items of income, gain, loss, anddeduction of the partnership in computing his federal income tax liabilitywithout regard to whether corresponding cash distributions are received from thepartnership by him. The income tax provisions for the three and nine monthsended September 30, 2007 were based on the pre-tax results determined on aseparate-return basis.

 

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**EBITDA**

 

EBITDArepresents net income plus interest expense, provision for income taxes anddepreciation and amortization expense. EBITDA is presented to provide investorswith meaningful additional information that management uses to monitor ongoingoperating results and evaluate trends over comparative periods.

 

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

 

EBITDAallows us to assess the ability of assets to generate cash sufficient toservice debt, make distributions and undertake capital expenditures. Byeliminating the cash flow effect resulting from our existing capitalization andother items such as drydocking expenditures and working capital changes (whichmay vary significantly from period to period), EBITDA provides a consistentmeasure of our ability to generate cash over the long term. Management usesthis information as a significant factor in determining (a) our propercapitalization (including assessing how much debt to incur and whether changesto the capitalization should be made) and (b) whether to undertakematerial capital expenditures and how to finance them, all in light of existingcash distribution commitments to unitholders. Use of EBITDA as a liquiditymeasure also permits investors to assess our fundamental ability to generatecash sufficient to meet cash needs, including distributions on our commonunits.

 

EBITDAshould not be considered as a substitute for net income, cash flow fromoperating activities prepared in accordance with accounting principlesgenerally accepted in the United States or as a measure of profitability orliquidity.  While EBITDA is frequentlyused as a measure of operating results and performance, it is not necessarilycomparable to other similarly titled captions of other companies due todifferences in methods of calculation.

 

Thefollowing table reconciles net income, as reflected in our statements ofoperations, to EBITDA:

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **In thousands**              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net (loss)/income                  |       | $                                                    | (9,698     | )                                                   | $          | (1,577 | ) | $ | (1,008 | ) | $ | 5,300 |   |
| Provision for federal income taxes |       | —                                               |       | 434                                                 |       | — |   | 1,658 |   |
| Interest expense                   |       | 1,295                                                |       | 3,523                                               |       | 4,153 |   | 10,231 |   |
| Depreciation and amortization      |       | 12,902                                               |       | 12,234                                              |       | 39,602 |   | 34,698 |   |
| EBITDA                             |       | $                                                    | 4,499      |                                                | $          | 14,614 |   | $ | 42,747 |   | $ | 51,877 |   |

 

Thefollowing table reconciles net cash provided by operating activities, asreflected in our statements of cash flows, to EBITDA:

 
| ** **                                                      | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **In thousands**                                           | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Net cash provided by operating activities                       |       | $                                                       | 52,054     |   | $ | 18,072 |   |
| Payments for drydocking                                         |       | 21,923                                                  |       | 11,729 |   |
| Interest expense                                                |       | 4,153                                                   |       | 10,231 |   |
| Undistributed earnings from affiliated  companies               |       | (2,994                                                  | )          | (3,618 | ) |
| Loss on vessel impairment                                       |       | (19,319                                                 | )          | — |   |
| Changes in operating assets and liabilities  (except for taxes) |       | (11,809                                                 | )          | 12,148 |   |
| Federal income taxes                                            |       | —                                                  |       | 3,325 |   |
| Other                                                           |       | (1,261                                                  | )          | — |   |
| EBITDA                                                          |       | $                                                       | 42,747     |   | $ | 51,887 |   |

 

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***Liquidity and Sources of Capital***

 

Workingcapital at September 30, 2008 was $31.4 million compared with $15.0million at December 31, 2007. We operate in a capital intensive industry.In addition to distributions on our partnership units, our primary liquidityrequirements relate to our operating expenses, including payments under ourmanagement and administrative services agreements, drydocking expenditures,payments of interest and principal under our senior secured revolving creditfacility and secured debt obligations. Our long-term liquidity needs primarilyrelate to capital expenditures for the purchase or construction of vessels.

 

Theamount of available cash we need to pay the minimum quarterly distributions forfour quarters on our common units, subordinated units and general partnerinterest is $45.9 million. There is no guarantee that we will pay the minimumquarterly distribution on our common and subordinated units in any quarter andwe will be prohibited from making any distributions to unitholders if it wouldcause an event of default, or an event of default exists, under our creditagreement.

 

Weanticipate that our primary sources of funds for our short-term liquidity needswill be cash flows from operations. We believe that cash flows from operationsand bank borrowings from our senior secured revolving credit facility referredto below will be sufficient to meet our existing short-term liquidity needs forthe next 12 months.

 

In November 2007, we entered into a $200 millionfive-year senior secured revolving credit facility.  Borrowings under this facility bear interestat a rate based on LIBOR. The facility may be extended by 24 months subject toapproval by lenders. As of September 30, 2008, $78.0 million wasoutstanding under the facility.

 

Wewere in compliance with all of the financial covenants contained in our debtagreements as of September 30, 2008. The senior secured revolving credit facility will prevent us fromdeclaring or making distributions if any event of default, as defined in thesenior secured revolving credit agreement, exists or would result from suchpayments. In addition, the senior secured revolving credit facility imposescertain operating restrictions and requires us to adhere to certain minimumfinancial covenants. Our failure to comply with any of the covenants in theagreements could result in a default, which would permit lenders to acceleratethe maturity of the debt and to foreclose upon collateral securing the debt.Under those circumstances, we might not have sufficient funds or otherresources to satisfy our remaining obligations.

 

*Cash Flows*

 

*Operating cash flows.*  Netcash flow provided by operating activities was $52.1 million and$18.1 million for the nine months ended September 30, 2008 and 2007,respectively. The increase of $34.0 million was primarily attributable tohigher operating earnings before the non-cash loss on vessel impairment, adecrease in receivables and higher payables and accrued expenses. Theseincreases were partially offset by an increase in payments for drydocking of$10.2 million in the first nine months of 2008 compared with the same period in2007.

 

Netcash flow from operating activities depends upon the timing and amount ofdrydocking expenditures, repairs and maintenance activity, vessel additions anddispositions, changes in interest rates, fluctuations in working capitalbalances and spot market freight rates. The number of vessel drydockings variesfrom year to year.

 

*Investing cash flows.*  Netcash used in investing activities was $40.1 million and $31.4 million for thenine months ended September 30, 2008 and 2007, respectively. Investingactivities for the nine months ended September 30, 2008 related primarilyto the double hulling of one barge, the drydocking of six vessels and progresspayments for the two new tugs under construction.  Investing activities in 2007 related primarilyto costs that were incurred double-hulling two barges.

 

*Financing cash flows.* Net cash provided by financing activitieswas $17.7 million and $13.3 million for the nine months ended September 30,2008 and 2007, respectively.  During thenine months ended September 30, 2008, we borrowed $78.0 million under thesenior secured revolving credit facility. Repayments of debt representregularly scheduled installments under secured term loans and the repayment ofcapital lease obligations in connection with the purchase of the *Overseas New Orleans* and the *Overseas Philadelphia* in June 2008.

 

*Ongoing Capital Expenditures*

 

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

 

Overthe next three years, we estimate that we will spend an average ofapproximately $18 to $20 million per year for drydocking and classificationsociety surveys. We drydock our vessels twice in every five-year period and, asour fleet matures and expands, our drydocking expenses will likely increase.Ongoing costs for compliance with environmental regulations are primarilyincluded as part of our drydocking and classification society survey costs orare a component of our operating expenses. In addition, vessels may have to bedrydocked in the event of accidents or other unforeseen damage. 

 

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Periodically,we also incur expenditures to acquire or construct additional product carriersand barges and/or to upgrade vessels in order to comply with statutoryregulations. We are not aware of any regulatory changes or environmentalliabilities that will have a material impact on our current or futureoperations.

 

Webelieve that our cash flow from charters-out will be sufficient to cover theinterest and principal payments under our debt agreements, amounts due underthe administrative services and management agreements, other general andadministrative expenses and other working capital requirements for the shortand medium term. To the extent we pursue other vessel acquisitions, we expectto finance any such commitments from existing long-term credit facilities andadditional long-term debt as required. The amounts of working capital and cashgenerated from operations that may, in the future, be utilized to financevessel commitments are dependent on the rates at which we can charter ourvessels. Such charter rates are volatile.

 

Becausewe distribute all of our available cash, we may not grow as fast as companiesthat reinvest their available cash. We expect that we will rely upon externalfinancing sources, including bank borrowings and the issuance of debt andequity securities, to fund acquisitions and expansion capital expenditures. Asa result, to the extent we are unable to finance growth externally, our cashdistribution policy will significantly impair our ability to grow. To theextent we issue additional units in connection with any acquisitions orexpansion capital expenditures, the payment of distributions on thoseadditional units may increase the risk that we will be unable to maintain orincrease our per unit distribution level, which in turn may affect theavailable cash that we have to distribute on each unit. Our partnershipagreement does not limit our ability to issue additional units, including unitsranking senior to our common units. The incurrence of additional debt by us orour operating subsidiaries would result in increased interest expense, which inturn may also affect the available cash that we have to distribute to ourunitholders.

 

*Aggregate Contractual Obligations*

 

Asummary of our long-term contractual obligations as of September 30, 2008follows:

 
| **In thousands**                                            | ** ** | **Balance of  2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Beyond  2012** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|------------------|------------|-----------|------------|
| Long-term debt (1)                                               |       | $                         | 2,154      |     | $          | 9,383    |       | $        | 9,353      |     | $          | 9,353            |       | $         | 87,054     |   | $ | 35,260 |   | $ | 152,557 |   |
| Operating lease obligations (chartered-in  vessels) (2)          |       | 9,639                     |       | 51,791   |       | 61,539   |       | 64,331   |       | 64,306   |       | 150,286          |       | 401,892   |       |
| Operating lease obligations with OSG  (chartered-in vessels) (3) |       | 1,344                     |       | 4,151    |       | —   |       | —   |       | —   |       | —           |       | 5,495     |       |
| Construction installments (4)                                    |       | 785                       |       | 7,065    |       | —   |       | —   |       | —   |       | —           |       | 7,850     |       |
| Total                                                            |       | $                         | 13,922     |     | $          | 72,390   |       | $        | 70,892     |     | $          | 73,684           |       | $         | 151,360    |   | $ | 185,546 |   | $ | 567,794 |   |

 

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| (1)    | Amounts  shown include contractual interest obligations.                                                                                                                                                  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                      |
| (2)    | As  of September 30, 2008 we had charter-in commitments for eight vessels on  leases that are, or will be, accounted for as operating leases. These leases  provide us with various renewal options. |
|   |                                                                                                                                                                                                      |
| (3)    | Represents  charter-in commitment for one vessel on charter from OSG as of September 30,  2008.                                                                                                      |
|   |                                                                                                                                                                                                      |
| (4)    | Represents  remaining shipyard commitments and excludes capitalized interest and other  construction costs.                                                                                               |

 

*Senior Secured Revolving Credit Facility*

 

OnNovember 15, 2007, our wholly owned subsidiary OSG America OperatingCompany LLC, entered into a $200 million senior secured revolving creditfacility with ING Bank N.V. and DnB NOR Bank ASA.  As of September 30, 2008, $78.0 millionwas outstanding under the facility, at an average interest rate of 3.65%.

 

Borrowingsunder the senior secured revolving credit facility are due and payable fiveyears 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 afterthe second anniversary of the closing date and which may be approved by thelenders. Drawings under the facility are available on a revolving basis untilthe earlier of one month prior to the applicable maturity date or the date onwhich the facility is permanently reduced to zero and the lenders are no longerrequired to make advances.

 

Borrowingsunder the senior secured revolving credit facility are secured by firstpreferred mortgages on certain owned vessels, and are guaranteed by us.

 

OSGAmerica Operating Company LLC may, at its option, prepay all loans under oursenior secured revolving credit facility at any time without penalty (otherthan customary breakage costs).  Theoutstanding loans under the senior secured

 

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revolvingcredit facility bear interest at a rate equal to LIBOR plus a margin (70 basispoints per year until the fifth anniversary of the closing date and, if theextension option is exercised, 75 basis points per year thereafter).

 

The senior secured revolving credit facility prevents us from declaringor making distributions if any event of default, as defined in the seniorsecured revolving credit agreement, exists or would result from such payments.In addition, the senior secured revolving credit facility requires us to adhereto certain financial covenants.

 

*Off Balance Sheet Arrangements*

 

Wedo not currently have any liabilities, contingent or otherwise, that we considerto be off balance sheet arrangements.

 

**ITEM 3.          QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Interest Rate Risk***

 

Weare exposed to the impact of interest rate changes primarily through ourunhedged floating-rate borrowings. Significant increases in interest ratescould adversely affect our operating margins, results of operations and ourability to service our debt. From time to time, we may use interest rate swapsto reduce our exposure to market risk from changes in interest rates. Theprincipal objective of these contracts would be to minimize the risks and costsassociated with our floating-rate debt. As of September 30, 2008,long-term debt except for the $78.0 million drawn on the senior securedrevolving credit facility, consisted of fixed-rate secured term loans.  As of September 30, 2008, forward startinterest rate swaps effectively convert our interest rate exposure on $30.0million from a floating rated based on LIBOR to a fixed rate of 4.35%commencing in 2009.

 

Weintend to invest our cash in financial instruments with maturities of less thanthree months within the parameters of our investment policy and guidelines.

 

Wemay use interest rate swaps to manage the impact of interest rate changes onearnings and cash flows. Changes in the fair value of interest rate swaps areeither offset against the fair value of assets or liabilities through income,or recognized in other comprehensive income until the hedged item is recognizedin income. The ineffective portion of an interest rate swap’s change in fairvalue is immediately recognized in income. Premiums and receipts, if any, arerecognized as adjustments to interest expense over the lives of the individualcontracts.

 

***Foreign Currency Risk***

 

Theshipping industry’s functional currency is the U.S. dollar. All of our revenuesand most of our operating costs are in U.S. dollars.

 

**Report of Independent Registered Public Accounting Firm onReview of Interim Financial Information**

 

Thecondensed consolidated financial statements as of September 30, 2008 andfor the three and nine months ended September 30, 2008 and the condensedpredecessor combined financial statements for the three and nine months ended September 30,2007 are unaudited; however, such financial statements have been reviewed byour independent registered public accounting firm.

 

**Available Information**

 

Weare subject to the information requirements of the Securities Exchange Act of1934 and, in accordance therewith, we are required to file with the SECperiodic reports and other information. These reports and other information maybe inspected and copied at the Public Reference Room maintained by the SECat 100 F Street, N.E., Washington, D.C. 20549 or obtained from the SEC’swebsite (http://www.sec.gov). Our website on the internet is located at http://www.osgamerica.com.Our periodic reports and other information filed with or furnished to the SECare available, free of charge, through our website, as soon as reasonablypracticable after those reports and other information are electronically filedwith or furnished to the SEC.

 

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**ITEM 4(T).    CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this Quarterly Report on Form 10-Q, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, the Company’smanagement, including the CEO and CFO, concluded that the Company’s currentdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by the Company in the reports the Company files orsubmits under the Exchange Act is (i) recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms and (ii) accumulated and communicated tothe Company’s management, including the CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure. There have been no material changes in the Company’s internal controlsor in other factors that could materially affect these controls during theperiod covered by this Quarterly Report.

 

**PART II– OTHER INFORMATION**

 

**ITEM 1.          LEGAL PROCEEDINGS**

 

Weare party to routine, marine related claims, lawsuits and labor arbitrationsarising in the ordinary course of our business. The claims made in connectionwith our marine operations are covered by insurance, subject to applicablepolicy 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**

 

Therehave been no material changes in the Partnership’s risk factors from those disclosedin our Annual Report on Form 10-K for the year ended December 31,2007, other than to the risk factors shown below.

 

***Our business would be adverselyaffected if either we or our general partner failed to comply with the JonesAct foreign ownership provisions.***

 

Tomaintain our privilege of operating our vessels in the Jones Act trade we mustmaintain U.S. citizen status for Jones Act purposes.  To ensure compliance with the Jones Act, bothwe and Overseas Shipholding Group, Inc. (“OSG”), through its ownership ofour general partner, must be U.S. citizens qualified to document vessels forcoastwise trade.  Our partnershipagreement restricts ownership by non-U.S. citizens of our outstandingpartnership interests to a percentage equal to no more than 24% as determinedfrom time to time by our general partner. Our general partner has determined to initially limit foreign ownershipof our partnership interests to 15%.  OSG’sgoverning documents contain similar provisions restricting foreign ownership asdetermined from time to time by OSG’s Board of Directors.  OSG’s Board of Directors has limited foreignownership of OSG’s outstanding common stock to 23%.

 

OnApril 16, 2008, OSG announced that U.S. ownership of its common stock atthe close of business on April 15, 2008 had declined to 77%, the minimumpercentage that its certificate of incorporation and by-laws mandate must beowned by U.S. citizens.

 

Ifmore than 25% of OSG’s outstanding common stock were owned or controlled bynon-U.S. citizens, OSG would no longer qualify as a U.S. citizen for Jones Actpurposes.  The consequences of OSG’sfailure to qualify as a U.S. citizen under the Jones Act would have an adverseeffect on us as we would be prohibited from operating our vessels in the U.S.coastwise trade.

 

***American Shipping Company (“Amsc”) has informed us and OSG that asa result of OSG’s order of three articulated tug barges (“ATBs”) from BenderShipbuilding & Repair Co., Inc. (“Bender”), Amsc is exercising a right it claims tohave under its agreement with us and OSG to impose a five year extension of theterm of each of the bareboat charters for the ten Jones Act product carriersthat subsidiaries of OSG are chartering from subsidiaries of Amsc. Amsc has also notified OSGthat Amsc was unilaterallyreversing the building sequence of two vessels, one of which is to be used as ashuttle tanker.***

 

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OnOctober 25, 2007, Amsc informed us and OSG that Amsc was exercising its alleged right to extend the bareboatcharters for an additional five year period, according to Amsc’s calculation (which we and OSG dispute), as a result ofOSG’s order of the three ATBs from Bender. At that time, Amsc also claimed that both we and OSGlost our rights in the separate and independent provision to reduce the fixedterms of the bareboat charters to three years (or one year for the charters ineffect for two or more years) if Amsc Philadelphia Shipyard, Inc. (“APSI”)contracts to build product carriers or ocean going tank barges for thirdparties.

 

Weand OSG dispute Amsc’s claims because, among otherreasons, we believe that Amsc waived, contracted away, and isotherwise estopped from asserting, its right under its agreement with respectto the order for the tank barges and further that Amscviolated its agreement with OSG to use its best efforts to negotiate in goodfaith and agree upon the documentation of the clear agreement concerning ATBscontained in the Amendment Agreement.

 

OnJanuary 11, 2008 Amsc sent to OSG and us a noticedemanding arbitration of Amsc’s claims against OSG and us.  We (along with OSG) have denied Amsc’s claims in the arbitration and have brought a counterclaimagainst Amsc concerning its October 2007position with respect to our right to reduce the bareboat charter terms of thevessels should APSI contract to build product carriers or ocean going tankbarges for third parties.

 

Theparties have appointed an arbitration panel, are finishing discovery and aredeposing potential witnesses for the arbitration hearings. The hearings on themerits are scheduled to begin on November 10, 2008.

 

Afive year extension of the initial term of the bareboat charters would lengthenthe period we are required to charter these vessels.  This mandatory extension could have anadverse effect on us because it removes our option to decide if it isadvantageous to us to charter each vessel for the five year extension period,the quantification of such adverse effect being dependent upon marketconditions during such five year period. Furthermore, permitting Amsc to competeagainst us — based on the argument, which Amsc has made andwhich we dispute, that we have each lost our rights in the separate andindependent provision to reduce the fixed terms of the bareboat charters tothree years (or one year for charters in effect for two or more years) if APSIcontracts to build product carriers or ocean going tank barges for third parties— could have an adverse effect on us, the quantification of such adverse effectbeing dependent upon market conditions during the relevant period.  No assurances can be given that our positionswith respect to Amsc’s claims will be upheld in thearbitration.

 

OnOctober 14, 2008, Amsc notified OSG that Amsc was reversing the building sequence of two vessels, one fora product carrier contractually obligated to be delivered on or before September 19,2009 to be named the Overseas Cascade, which Amsc has agreedmay be converted to a shuttle tanker, and the other for a product carriercontractually obligated to be delivered to OSG on or before January 18,2010 to be named the Overseas Martinez, which OSG does not have the right toconvert to a shuttle tanker.  We and OSGdispute Amsc’s ability to make this switch in hullsand delivery dates without OSG’s consent, and OSG immediately objected to Amsc’s action.

 

OnOctober 21, 2008, OSG requested that the arbitration panel that isdeciding the merits of the dispute described above also decide expeditiouslythe merits of the dispute concerning the change in delivery dates of theOverseas Cascade and Overseas Martinez to avoid or reduce any harm to OSG orits customers from Amsc’s unilateral change in deliverydates.  No assurance can be given thatour and OSG’s position that Amsc can not amend the delivery datesof these two vessels without OSG’s consent will be upheld in the arbitration.

 

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

 

None.

 

**ITEM 6.          EXHIBITS**

 

SeeExhibit Index on page 31.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

Wehave reviewed the condensed consolidated balance sheet of OSG America L.P. asof September 30, 2008 and the related condensed consolidated statements ofoperations for the three-month and nine-month periods ended September 30,2008, the condensed predecessor combined carve-out statements of operations forthe three-month and nine-month periods ended September 30, 2007, thecondensed consolidated statement of changes in partners’ capital for the nine-monthperiod ended September 30, 2008, the condensed consolidated statement ofcash flows for the nine-month period ended September 30, 2008 and thecondensed predecessor combined carve-out statement of cash flows for thenine-month period ended September 30, 2007.  These financialstatements are the responsibility of the Partnership’s management.

 

Weconducted our review in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public Company AccountingOversight Board, the objective of which is the expression of an opinionregarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Basedon our review, we are not aware of any material modifications that should bemade to the condensed consolidated financial statements or the predecessorcondensed combined carve-out financial statements referred to above for them tobe in conformity with U.S. generally accepted accounting principles.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet ofOSG America L.P as of December 31, 2007, and the related consolidatedstatements of operations, cash flows and changes in partners’ capital for theyear then ended not presented herein, and in our report dated March 6,2008, we expressed an unqualified opinion on those consolidated financialstatements.  In our opinion, theinformation set forth in the accompanying condensed consolidated balance sheetas of December 31, 2007, is fairly stated, in all material respects, inrelation to the consolidated balance sheet from which it has been derived.

 

 

/s/ Ernst & Young LLP

 

CertifiedPublic Accountants

 

Tampa,Florida

 

November 4,2008

 

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|        | OSG  AMERICA L.P.                        |
|--------|------------------------------------------|
|   | (Registrant)                             |
|   |                                     |
|   | by  OSG America LLC, its general partner |
|   |                                     |
| Date:  | November 6,  2008                   |   | /s/  Jonathan P. Whitworth |
|   | Jonathan  P. Whitworth                   |
|   | President  and Chief Executive Officer   |
|   |                                     |
|   |                                     |
| Date:  | November 6,  2008                   |   | /s/  Myles R. Itkin |
|   | Myles  R. Itkin                          |
|   | Chief Financial Officer                  |

 

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**EXHIBITINDEX**

** **
| 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. |

 

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