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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 001-32326

U.S. SHIPPING PARTNERS L.P.
(Exact name of registrant as specified in its charter)

Securities Registered pursuant to Section 12(b) of the Act:

Securities Registered pursuant to Section 12(g) of the Act: None.

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ý

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

        The registrant's common units were not publicly traded as of the last business day of the registrant's most recently completed second quarter. The aggregate market value of the registrant's common units held by non-affiliates as of March 17, 2005, based on the reported closing price of such units on the New York Stock Exchange on such date, was approximately $177,590,000. The number of common units outstanding of the registrant's common units as of March 17, 2005 was 6,899,968. At that date, 6,899,968 subordinated units were also outstanding.

U.S. SHIPPING PARTNERS L.P.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

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FORWARD-LOOKING STATEMENTS

        Statements included in this report which are not historical facts (including statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, we may from time to time make other oral or written statements which are also forward-looking statements.

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

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forecasts of our ability to make cash distributions on the units;



•

planned capital expenditures and availability of capital resources to fund capital expenditures;



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future supply of, and demand for, refined petroleum products;



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potential reductions in the supply of tank vessels due to restrictions set forth by the Oil Pollution Act of 1990 ("OPA 90");



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increases in domestic refined petroleum product consumption;



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



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our ability to maintain long-term relationships with major oil and chemical companies;



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the absence of disputes with our customers;



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our ability to maximize the use of our vessels;



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expected financial flexibility to pursue acquisitions and other expansion opportunities;



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our expected cost of complying with OPA 90;



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estimated future maintenance capital expenditures;



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the absence of future labor disputes or other disturbances;



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expected demand in the domestic tank vessel market in general and the demand for our tank vessels in particular;



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future consolidation in the domestic tank vessel industry;



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customers' increasing emphasis on environmental and safety concerns;



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continued outsourcing of non-strategic functions, such as domestic tank vessel operations, by companies in the oil and chemical industries;



•

our future financial condition or results of operations and our future revenues and expenses; and



•

our business strategy and other plans and objectives for future operations.

        These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

        Important factors that could cause our actual results of operations or our actual financial condition to differ include, but are not necessarily limited to:

•

insufficient cash from operations;

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•

a decline in demand for refined petroleum, petrochemical and commodity chemical products;



•

a decline in demand for tank vessel capacity;



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intense competition in the domestic tank vessel industry;



•

the occurrence of marine accidents or other hazards;



•

the loss of any of our largest customers;



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fluctuations in voyage charter rates;



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delays or cost overruns in the construction of new vessels or the retrofitting or modification of older vessels;



•

changes in international trade agreements;



•

failure to comply with the Jones Act;



•

modification or elimination of the Jones Act; and



•

adverse developments in our marine transportation business.

        Please read Risk Factors in Item 7 of this report for a discussion of the factors that could cause our actual results of operations or our actual financial condition to differ from our expectations.

INDUSTRY DATA

        Market and industry data and other statistical information used throughout this filing are based on independent industry publications, government publications and other published independent sources, as well as on several studies conducted for us by Wilson Gillette & Co., Petroleum and Logistics Specialists, who we refer to in this filing as Wilson Gillette. The most recent government data available regarding the petroleum industry are for 2003. Some data are also based on our good faith estimates, which are derived from management's knowledge of the industry and independent sources. Although we believe that these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness. Similarly, we believe our internal research is reliable, but it has not been verified by any independent sources.

        Unless otherwise indicated, the market and industry statistical data that we use in the discussion of the tank vessel industry contained in "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" have been provided to us by Wilson Gillette. We believe that the information and data supplied by Wilson Gillette is accurate in all material respects and we have relied upon them for purposes of this filing and have not independently verified Wilson Gillette's data from other third-party sources. Wilson Gillette has advised us that:

•

some information in Wilson Gillette's database is derived from estimates or subjective judgments; and



•

while Wilson Gillette has taken reasonable care in the compilation of the statistical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures and may accordingly contain errors.

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PART I

ITEM 1.    BUSINESS

Our Partnership

        We are a leading provider of long-haul marine transportation services, principally for refined petroleum products, in the U.S. domestic "coastwise" trade. We are also involved, to a limited extent, in the coastwise transportation of petrochemical and commodity chemical products. Marine transportation is a vital link in the distribution of refined petroleum, petrochemical and commodity chemical products in the United States, with approximately 28% of domestic refined petroleum products being transported by water in 2002. Our fleet consists of eight tank vessels: six integrated tug barge units, or ITBs, and two specialty refined petroleum and chemical product, or parcel, tankers. Our primary customers are major oil and chemical companies. A significant portion of our fleet capacity is currently committed to these companies pursuant to contracts with initial terms of one year or more, which provides us with a relatively predictable level of cash flow. We do not assume ownership of any of the products that we transport on our vessels.

        Our market is largely insulated from direct foreign competition because the Merchant Marine Act of 1920, commonly referred to as the Jones Act, restricts U.S. point-to-point maritime shipping to vessels operating under the U.S. flag, built in the United States, at least 75% owned and operated by U.S. citizens and manned by U.S. crews. All of our vessels are qualified to transport cargo between U.S. ports under the Jones Act.

        We began operations in September 2002 when we acquired our six ITBs from a division of Amerada Hess that was managed by several executive officers of our general partner. Our six ITBs primarily transport clean refined petroleum products, such as gasoline, diesel fuel, heating oil, jet fuel and lubricants, from refineries and storage facilities to a variety of destinations, including other refineries and distribution terminals. Four of our ITBs are currently operating under contracts with Hess, BP and Shell, one of which expires in September 2005 and one of which expires in January 2006, with the remaining two expiring in late 2006. Our remaining two ITBs are currently operating in the spot market. Regardless of our contract rates and rates in the spot market, we are assured specified minimum charter rates for our ITBs through September 13, 2007, subject to certain limited exceptions, pursuant to a support agreement we entered into with Hess in connection with our acquisition of the six ITBs.

        Our two parcel tankers, the Chemical Pioneer and the Charleston, which we acquired in May 2003 and April 2004, respectively, primarily transport specialty refined petroleum, petrochemical and commodity chemical products, such as lubricants, paraxylene, caustic soda and glycols, from refineries and petrochemical manufacturing facilities to other manufacturing facilities or distribution terminals. We have contracts with Dow Chemical, ExxonMobil, Koch Industries, Lyondell Chemical and Shell with specified minimum volumes that will, in aggregate, account for approximately 74% of the anticipated usable capacity of the Charleston through July 2007 and 75% of the anticipated usable capacity of the Chemical Pioneer through February 2007. In addition, these customers are required to ship on our parcel tankers any additional volumes of these products shipped to the ports specified in the contracts. As a result, we expect these companies will utilize substantially all of the non-committed capacity of these vessels during those periods.

        In August 2004, we signed a fixed-price contract for construction of a 19,999 ton articulated tug barge unit, or ATB, which is scheduled to be delivered in early 2006. We have entered into contracts to carry commodity chemical products with specified minimum volumes that will utilize approximately 77% of the ATB's anticipated capacity through September 2007 and approximately 67% of the ATB's anticipated capacity thereafter through June 2010. If delivery of the ATB is delayed, we anticipate that we will either use available cargo capacity on one of our vessels or charter additional vessels to meet

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our contractual obligations pending delivery of the ATB. Our ATB construction contract also provides us with options to purchase three additional ATBs over the next 24 months at fixed prices, subject to limited exceptions.

Business Strategies

        Our primary business objective is to increase our distributable cash flow per unit by executing the following strategies:

•

Operate our fleet safely and efficiently to meet the most stringent customer vetting and industry standards and remain a preferred supplier to major oil and chemical companies. Major oil and chemical companies place particular emphasis on strong environmental and safety records and efficient operations. We believe we are a high quality, cost-efficient and reliable tank vessel operator. We intend to continue improving our operational safety and efficiency through the use of new technology and comprehensive training programs for new and existing employees. We also intend to minimize off-hire time and costs by emphasizing efficient scheduling and timely completion of planned and preventative maintenance both on-shore and at sea. This maintenance, combined with the twin redundant engine configuration on our ITBs, has allowed us to average less than one day of unscheduled off-hire per ITB per year over the past five years. We intend to continue building on our reputation for maintaining high standards of performance, reliability and safety, which we believe has enabled us to attract highly-selective customers.



•

Contract a high proportion of our capacity with major oil and chemical companies for periods of one year or more in an effort to maintain steady cash flows from creditworthy customers through business cycles, while maintaining some flexibility to respond to changing market conditions. Vessels operating on time charters or contracts of affreightment generally provide more predictable cash flow, while vessels operating under spot charters may generate increased profit margins during periods of increasing charter rates. We intend to pursue a strategy of emphasizing longer-term contracts, while preserving operational flexibility to take advantage of changing market conditions. Four of our six ITBs are operating under contracts that have been in effect for at least two years. Our remaining two ITBs are currently operating in the spot market. However, the Hess support agreement effectively provides us with minimum fixed rates for our six ITBs through September 13, 2007, subject to certain limited exceptions. With respect to our parcel tankers, we have contracts of affreightment that will, in aggregate, account for approximately 75% of the anticipated usable capacity of one vessel through February 2007 and 74% of the anticipated usable capacity of the other vessel through July 2007. In addition, these contracts generally require the customer to ship excess volume of the products covered by the contract on the routes covered by the contract on our parcel tankers. As a result, we expect these customers will account for substantially all of the non-committed capacity of these vessels during those periods.



•

Expand our fleet through accretive strategic acquisitions and, to a lesser extent, construction of new vessels. We have grown successfully in the past through strategic acquisitions. In September 2002 we acquired our six ITBs from Hess, and acquired our Chemical Pioneer and Charleston parcel tankers in May 2003 and April 2004, respectively. We expect to continue this strategy by consistently surveying the marketplace to identify and pursue acquisitions, as well as newbuilding opportunities, that expand the services and products we offer or that expand our geographic presence. While we will be required to make capital expenditures to bring our ITBs in compliance with OPA 90, we also plan to continue our strategy of vessel acquisitions. In August 2004, we contracted for the construction of an ATB, the delivery of which is scheduled for early 2006, and have options to build three additional ATBs under the same terms and conditions at fixed prices, subject to limited exceptions.

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•

Capitalize on the strong industry reputation we believe we have with major oil and chemical companies seeking to outsource their marine transportation needs. We believe there will continue to be significant revenue growth opportunities as major oil and chemical companies increase their focus on their core competencies and consider outsourcing non-core operations, such as product transportation operations. Because the delivery and logistics infrastructure maintained by major oil and chemical companies is difficult to manage and requires substantial internal expertise and resources, including capital spending and management focus, we believe major oil and chemical companies will choose to divest logistics assets, such as tank vessels, and outsource product transportation operations, particularly in lieu of retrofitting, or constructing new vessels to replace, existing vessels that must be phased out under OPA 90. We believe we have a reputation for high standards of performance, reliability and safety, which we believe will make us the partner of choice for companies seeking to outsource their product transportation operations.

Principal Executive Offices

        Our principal executive offices are located at 399 Thornall Street, 8^th Floor, Edison, New Jersey 08837, and our phone number is (732) 635-1500.

        We were formed to own and operate the long-haul coastwise marine transportation business conducted by United States Shipping Master LLC (along with its subsidiaries, "Shipping Master LLC"). On November 3, 2004 Shipping Master LLC contributed substantially all its assets and liabilities constituting its business to us in connection with our initial public offering of common units representing limited partnership interests. In exchange for these assets and liabilities, Shipping Master LLC received 899,968 common units and 6,899,968 subordinated units (of which 5,272,341 were classified as Class A subordinated units and 1,627,627 were classified as Class B subordinated units) representing limited partnership interests in us. Our general partner, which is wholly-owned by Shipping Master LLC, received a 2% general partner interest and certain incentive distribution rights. We redeemed the 899,968 common units owned by Shipping Master LLC upon exercise of the underwriters' over-allotment in connection with our initial public offering.

OVERVIEW OF OUR INDUSTRY

Introduction

        We participate in the U.S. flag coastwise long-haul marine transportation of refined petroleum, petrochemical and commodity chemical products. Coastwise marine transportation of bulk liquids is primarily performed by tank vessels, including deep-sea self propelled vessels, integrated tug barges, or ITBs, articulated tug barges, or ATBs, and unmanned tank barges. U.S. flag tank vessels generally transport products between ports in the continental United States (including through the Panama Canal) or between mainland ports and Puerto Rico, Alaska or Hawaii, although these vessels may at times transport products internationally. Tank vessels provide a vital link in the transportation of these products in the United States.

        Tank vessels transport refined petroleum products, such as gasoline, jet fuel, diesel fuel and feedstocks, from refineries to terminals and facilities engaged in further processing, often in full vessel loads. Tank vessels with a relatively high number of tank segregations, called parcel tankers, transport smaller cargoes of specialty refined petroleum, petrochemicals and commodity chemicals, such as lubricants, styrene, glycols, paraxylene, caustic soda and alcohols, in a variety of coastwise distributive and balancing movements.

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        The U.S. flag coastwise marine transportation industry operates under the Jones Act (Merchant Marine Act of 1920), a set of Federal statutes that mandate that vessels engaged in trade between U.S. ports must:

•

operate under the U.S. flag;



•

be built in the United States;



•

be at least 75% owned and operated by U.S. citizens; and



•

manned by a U.S. crew.

        One of the primary purposes of the Jones Act is to maintain a fleet of vessels eligible for charter to the U.S. government for national defense requirements.

Methods of Transporting Refined Petroleum, Petrochemical and Commodity Chemical Products

        Refined petroleum products are transported by pipelines, marine transportation, truck and railroads. Pipelines are the most efficient mode of transportation for long-haul movement of refined petroleum products, followed by tank vessels. Rail and truck transportation of these products are more cost-effective only over short distances and, therefore, they account for only a small percentage of total ton miles transported. The carrying capacity of a 30,000 deadweight ton (dwt) tank vessel, which can transport approximately 225,000 barrels of refined petroleum products, is equivalent to approximately 378 average-size rail tank cars and approximately 945 average-size tractor trailer tank trucks. Marine transportation provides a vital link between a number of major refined petroleum product producing and consuming regions of the United States. There are no pipelines connecting the major refining areas in the Pacific Northwest and the Texas and Louisiana region with consumption markets in California, or connecting the major refining areas in the Texas and Louisiana region to the consuming areas in Florida. The Northeastern United States, a significant consuming region, is served by capacity-constrained pipelines connecting with the refining areas in Texas and Louisiana.

        Petrochemical and commodity chemical products are typically produced and moved in volumes considerably smaller than the capacity of an entire tank vessel. As pipelines cannot economically transport most petrochemical and commodity chemical products, most of these products are transported by rail, as the smaller unit sizes of railcars are conducive to typical shipment sizes. Parcel tankers, with multiple cargo compartments and cargo handling systems, can cost-effectively transport these products because they can accommodate the small shipment sizes without having a portion of the vessel capacity unfilled.

Industry Trends

        We believe the following industry trends, which are causing charter rates to rise and companies to seek longer term charters, create a positive outlook for our business:

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Demand for tank vessels continues to be strong. This strong demand results principally from rising consumption of refined petroleum products and the importance of marine transportation in the distribution of refined petroleum, petrochemical and commodity chemical products. A major factor in determining tank vessel demand is domestic refined petroleum product consumption, which continues to rise. The Energy Information Administration of the Department of Energy projects that retail demand for refined petroleum products in the United States will increase between 2003 and 2025 at a compounded annual growth rate of 1.6%. Although pipelines are a key component in the distribution chain, they do not reach all markets, may lack specific capacity to meet increasing demand and are not capable of transporting all refined petroleum products or economically transporting most chemical products. According to the Association of Oil Pipe Lines, approximately 28% of all domestic refined petroleum product transportation was by water

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in 2002, making waterborne transportation the second-most used mode of transportation for refined petroleum products after pipelines. While a substantial majority of all long-haul shipments of chemicals in the United States are by rail, Wilson Gillette estimates that approximately 5% are transported in the coastwise trade by tank vessels, and we believe this percentage would be higher if more Jones Act qualified parcel tankers were available. Many areas along the U.S. coast have access to refined petroleum, petrochemical and commodity chemical products only by marine transportation.

•

The domestic supply of tank vessels competing with us is decreasing. This decrease is due to: OPA 90, which mandates the phase-out of certain non-double-hulled tank vessels at varying times by January 1, 2015; and the Jones Act, which restricts the supply of new vessels by requiring that all vessels participating in the coastwise trade be constructed in the United States. As a result of OPA 90, the total barrel-carrying capacity of existing domestic tank vessels transporting refined petroleum products is projected to decline significantly from its current levels in the absence of newbuildings or retrofittings of existing tank vessels. We believe that the intensive capital requirements to construct new Jones Act tank vessels in U.S. shipyards for use in the coastwise trade will continue to deter the construction of new tankers, providing significant advantages to existing owners of high quality vessels. Due to the expected reduction in the availability of domestic tank vessels due to OPA 90, the major oil and chemical companies are increasingly interested in entering into long-term charter agreements in order to ensure shipping capacity for their products. According to Wilson Gillette, approximately 89% of the capacity of domestic tank vessels in excess of 30,000 dwt transporting refined petroleum products is trading under contractual arrangements having a term longer than one year, with only approximately 11% of such capacity available in the spot market.



•

Major oil and chemical companies are increasingly selective in their choice of tank vessel operators. These companies place particular emphasis on strong environmental and safety records, as well as operating performance. We believe that the increasingly stringent U.S. regulatory environment, the emphasis on quality and environmental protection and increasingly demanding customer vetting standards and procedures governing eligibility of vessels to engage in the coastwise trade for, and enter terminal facilities of, these customers, will accelerate the obsolescence of older, lower quality tank vessels and provide a competitive advantage to companies like us that operate high-quality tank vessels.



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The domestic tank vessel industry is consolidating. Major oil and chemical companies, which comprise the majority of our customer base, continue to increase their focus on their core competencies by divesting logistics assets, such as tank vessels, and outsourcing product transportation operations through long-term charters. Partly as a result of OPA 90 and the corresponding capital requirements to replace or retrofit existing tank vessel fleets, we believe many smaller, independent tank barge companies may find it increasingly difficult to compete profitably. In addition, major oil and chemical companies, which comprise the majority of our customer base, continue to increase their focus on their core competencies, divesting logistics assets, such as tank vessels, and outsourcing product transportation operations through long-term charters. The continuation of these trends would provide us with opportunities both to acquire additional assets and add customers.

Our Vessels

Integrated Tug Barge Unit Fleet

        In September 2002, we acquired a fleet of six refined petroleum product ITBs built in the United States in the mid-1980s and qualified for the coastwise trade. ITBs integrate a dedicated tugboat (which provides propulsion) into a cargo carrying barge using a coupling system that connects the two vessels.

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The rigid connection between the vessels enables the tug barge combination to be handled as though it were a single vessel, with better handling and maneuverability than a conventional tug and barge combination. Unlike self-propelled tankers, ITBs are designed to allow the aft section, containing the more complex controls and machinery, to be separated from the forebody cargo area. The tug and barge sections are locked together and are only separated during scheduled drydockings every five years. ITBs provide a major cost advantage compared to a tanker because ITBs require fewer crew members than tankers. Additionally, ITBs can operate in sea and weather conditions that conventional tug-barge combinations cannot.

        All six ITBs are "sister vessels" of the same design and built to the same specifications. As sister vessels, we can operate them more efficiently because we can use common procedures with all the ITBs, while inventory management can be centralized and crews and officers can be interchanged among vessels. In addition, sister vessels allow us to substitute vessels in service and service the same contract with different vessels.

        The following table sets forth the specifications and highlights for our six ITBs:

(1)

A vessel's cargo capacity is less than its deadweight capacity as a result of the fuel it carries for its operation. A vessel's cargo capacity may be further reduced to the extent draft clearance limits the ability of a vessel to enter or leave port with a full load.

(2)

One ITB has 10 cargo segregations.

(3)

The American Bureau of Shipping, or ABS, is an independent classification society that inspects the hull and machinery of commercial ships to assess compliance with minimum criteria as set by U.S. and international regulations. The classification of "A1" is ABS' highest hull structure classification.

        Double-bottom ship configurations are superior to single-hull configuration for the prevention of oil spills in the event of a grounding. As a result, charterers prefer double-bottom ships to conventional single-hull ships. Because the ITBs have two independent propulsion plants and are equipped with dual propellers and rudders, the risk of mechanical failure and unscheduled downtime for this fleet is lessened. We can perform engine maintenance at sea while the vessel is operating on the other engine.

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        The following table summarizes information about our ITBs:

        Four of our ITBs are currently operating under charters with BP (2 vessels), Hess and Shell. Each of these charters had an initial term of two to three years. One charter expires in September 2005, one expires in January 2006 and the remaining two expire in November and December 2006. The remaining two ITBs are currently operating in the spot market under voyage charters; however, regardless of rates in the spot market, we are assured specified minimum rates for these vessels through September 13, 2007 under the Hess support agreement, subject to certain limited exceptions. Although our ITBs principally transport refined petroleum products, we will on occasion transport crude oil if requested by a customer.

        The ITBs are required by both domestic (United States Coast Guard) and international (International Maritime Organization) regulatory bodies to be overhauled for major repair and maintenance every five years. During a drydocking an ITB is removed from service (typically for 45-55 days) and major repair and maintenance work is carried out. We currently estimate typical drydock costs for our ITBs will be approximately $4.0 million to $6.0 million per vessel for work occurring in U.S. shipyards. We can also drydock the ITBs in foreign shipyards, where the drydocking costs are lower. However, if we choose to drydock an ITB in a foreign shipyard, the ITB may be off-hire, and therefore not earning any revenue, for a longer period of time as it travels to and from the foreign shipyard if we cannot find a cargo to transport during that voyage. Drydocking costs are considered maintenance capital expenditures but are expensed immediately for tax purposes. In addition to drydocking each ITB every five years, we are required to conduct a mid-period underwater survey in lieu of drydocking the ITB for inspection. An underwater survey only requires an ITB to be removed from service for three to five days.

        The following table sets forth information regarding the drydocking of our ITBs:

(1)

Drydocked in China; includes transit time to and from a shipyard in China.

(2)

N/S—Not scheduled

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        Prior to their respective stipulated OPA 90 phase-out dates, we plan to extend the life of each of our ITBs by retrofitting them with an internal double-hull or by building new forebodies similar to the existing forebodies that have a fully compliant double-hull. A retrofit would involve installing double-sides internally in the existing forebody, rearranging ballast tanks and installing coating systems to protect all newly installed steel surfaces. This retrofit will result in a fully conforming double-hull vessel since the existing double-bottom of the ITB is fully conforming; however, the capacity of the vessel will decrease by approximately 5%. We estimate the current cost of this retrofit to be approximately $25 million per vessel, and will require an off-hire period of approximately 120 days if performed in a U.S. shipyard.

        In order to bring our ITBs into compliance with OPA 90, at a minimum we will be required to retrofit each ITB with double-sides. We may elect to construct new double-hulled forebodies for some or all of our vessels instead of retrofitting them with double-sides. This forebody will be built substantially in accordance with the design of the existing forebody, with selected upgrades of cargo systems and other modifications to equip these units with state-of-the-art technology. This new forebody can be constructed while the existing ITB continues to operate, requiring an off-hire period of approximately 60 days to join the new forebody to the existing tug and to conduct sea trials. We estimate the current cost of constructing a new forebody to be $55 million per vessel. We will base our final decision on whether to retrofit or to construct forebodies on the cost of shipyard work for each alternative at the time it is undertaken, market conditions, charter rates, the availability and cost of financing and other customary factors governing investment decisions. We believe that either option will be fully acceptable to our customers given the precedent of retrofitted double-hulls that have already occurred and are trading in the Jones Act.

        Hess Support Agreement.    In connection with our purchase of the six ITBs from Hess, we entered into a support agreement with Hess that provides, among other things:

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We will use our commercially reasonable efforts to charter out the ITBs and maximize the amount of time that the ITBs are employed, either on a time charter or spot charter basis;



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If we propose to enter into a time charter or spot charter for an ITB, we must notify Hess in advance, and Hess has a right to charter such ITB on the terms proposed with such third party;



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If we expect that an ITB will not be chartered for a period in excess of five consecutive days (other than for downtime, as described below), Hess has the right to propose, and we are required to accept, a spot charter for itself or a third party on commercially reasonable terms;



•

If the contracted rate (the "Negotiated Rate") for a spot charter or time charter of an ITB is less than the then effective charter rate for such ITB specified in the support agreement (the "Support Rate"), Hess is obligated to pay us the difference between the Support Rate and the Negotiated Rate. However, Hess is not obligated to compensate us for any downtime, which is defined as:



•

the ITB not being in service due to drydock or casualty;



•

the charterer not being required to pay under the charter due to the ITB being off-hire; or



•

the ITB not being in service because it has been finally determined in arbitration that we did not use commercially reasonable efforts to charter out such ITB;



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If the Negotiated Rate for an ITB exceeds the Support Rate, we must pay the excess to Hess to reimburse Hess for any payments made to us by Hess under the support agreement and, once Hess has been fully reimbursed for all payments made under the support agreement, we must pay Hess 50% of any remaining excess. Our obligation to reimburse Hess for these payments terminates upon termination of the support agreement;

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•

If we enter into a time charter for an ITB with a charterer having a senior unsecured long-term debt credit rating by Moody's Investor Services of Baa2 or better and a senior unsecured debt credit rating by Standard & Poor's of BBB or better, and (1) the Negotiated Rate for such charter equals or exceeds the then applicable Support Rate for the ITB and (2) the charterer consents to the assignment of such charter to our lenders as security for our debt, then Hess' payment obligation with respect to that ITB is suspended for the contracted term of the charter, whether or not the charterer is making payments to us or the charter is still in effect;



•

Neither we nor Hess can withhold or defer any payment due under the support agreement, although we each have limited set-off rights in respect of indemnification payments due from the other under the agreement pursuant to which we purchased the six ITBs and we can defer (with interest at the prime rate) any payment due to Hess under the support agreement if such payments would cause us to be in default under our senior credit facility;



•

Neither we nor Hess can terminate the support agreement unilaterally;



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The support agreement will terminate on September 13, 2007, or earlier if:



•

With respect to any individual ITB, the date on which



•

we sell such ITB,



•

such ITB ceases to be certified for use in United States coastwise trade, or



•

there is an actual, constructive, compromised or agreed total loss of such ITB; and



•

With respect to all ITBs, upon the occurrence of any one of the following events (each such event a "Sale of the Business") that results in equity holders of United States Shipping Master LLC ceasing to own, directly or indirectly, at least 50% of the surviving entity (or entities) that hold(s) title to the ITBs:



•

the sale of all or substantially all of our ITBs and related assets;



•

the sale of all the issued and outstanding securities of our subsidiary that owns the ITBs and related assets; and



•

the merger or consolidation of our subsidiary that owns the ITBs and related assets;



•

If during the term of the support agreement we sell one or more ITBs, other than in a Sale of the Business, or there is an actual, constructive, compromised or agreed total loss of one or more ITBs, we must use all proceeds (including insurance proceeds) in excess of required debt payments, taxes and out-of-pocket expenses incurred in connection with such sale or insurance recovery to reimburse Hess for all payments made by it under the support agreement and not previously reimbursed in the case of a sale and one-sixth of such payments in the case of an actual, constructive, compromised or total loss of the ITB.

        For the period from September 13, 2002 to December 31, 2002, the operation of two ITBs was covered by the support agreement. For the years ended December 31, 2004 and 2003, five and four ITBs, respectively, were covered. One ITB is under contract with Hess at a charter rate less than the support rate; this vessel will be covered by the support agreement upon any termination of that contract.

Parcel Tanker Fleet

        Our parcel tankers carry specialty refined petroleum, petrochemical and commodity chemical products primarily from refineries and chemical manufacturing plants and storage tank facilities along the coast of the U.S. Gulf of Mexico to industrial users in and around East Coast ports. The specialty refined petroleum products transported on our parcel tankers are generally not the types of refined

13

petroleum products transported by our ITBs but are products shipped in smaller volumes and used primarily in the manufacture of other products. Petrochemical and commodity chemical products transported by our parcel tankers consist primarily of paraxylene, caustic soda, alcohol, chlorinated solvents, alkylates, toluene and ethylene glycol.

        Because of the smaller cargo lot size requirements, parcel tankers are designed with many small cargo tanks. Unlike conventional tankers, parcel tankers are typically designed with one dedicated cargo pump, and associated piping system, for each tank, in order to eliminate cargo contamination. Some of the specialty refined petroleum, petrochemical and commodity chemical products transported must be carried in vessels with specially coated or stainless steel cargos tanks, as many of these cargos are very sensitive to contamination and require special cargo handling equipment.

        We currently operate two parcel tankers: the Chemical Pioneer, which we acquired from Dow Chemical in May 2003, and the Charleston, which we acquired from ExxonMobil in April 2004. The following table sets forth the specifications and highlights of our parcel tankers:

(1)

A vessel's cargo capacity is less than its deadweight capacity as a result of the fuel it carries for its operation. A vessel's cargo capacity may be further reduced to the extent draft clearance limits the ability of a vessel to enter or leave port with a full load.

(2)

The classification of "A1" is ABS' highest hull structure classification.

(3)

ABS also provides a condition assessment rating system; a CAP I rating is equivalent to a new build steel structure and a CAP II rating is equivalent to a five year old ship.

        The Chemical Pioneer and the Charleston are among the last independently owned carriers scheduled to be retired under OPA 90, with phase-out dates in 2013. Although the Chemical Pioneer is double-hulled, it is not OPA 90 compliant; however, we believe that a minor modification will bring the Chemical Pioneer into compliance with OPA 90. The Charleston is not OPA 90 compliant; however, we believe we will be able to obtain a waiver allowing us to carry refined petroleum products in the vessel's center tanks and non-petroleum-based products in the other tanks. Alternatively, since tankers carrying products or chemicals not regulated by OPA 90 (i.e., non-petroleum-based) are not subject to the mandated OPA 90 phase-out dates and, therefore, have extended trading lives, we may elect to change the operation of the parcel tankers to avoid having to retrofit them or phase them out. However, this change could materially adversely affect their value to us.

        Both the Chemical Pioneer and the Charleston have over 40 cargo segregations, which are configured, strengthened and coated to handle various sized parcels of a wide variety of petroleum products and industrial chemicals, giving them the ability to handle a broader range of specialty refined petroleum, petrochemical and commodity chemical products than other chemical-capable product carriers. These vessels also have specialized tank cleaning machines. Many of the petroleum and

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chemical products we transport in our parcel tankers are hazardous substances and therefore require highly qualified management and crew to operate the vessel safely.

        Current voyages for our parcel tankers are generally conducted from the Houston and Corpus Christi, Texas and Lake Charles, Louisiana areas to such ports as New York, New York, Philadelphia, Pennsylvania, Baltimore, Maryland, Wilmington, North Carolina and Charleston, South Carolina.

        We currently have contracts of affreightment with Dow Chemical, ExxonMobil, Koch Industries, Lyondell Chemical and Shell with specified minimum cargo requirements that will, in aggregate, account for approximately 74% of the anticipated usable capacity of the Charleston through July 2007 and 75% of the anticipated usable capacity of the Chemical Pioneer through February 2007. In addition, these contracts generally require the customer to ship excess volume of the products covered by the contract on the routes covered by the contract on our parcel tankers. As a result, we expect these companies will account for substantially all of the non-committed capacity of these vessels during those periods. When we acquired the Charleston from ExxonMobil in May 2004, we agreed to transport cargo for ExxonMobil generally transported by the S/R Wilmington while such vessel was in drydock. We operated under this arrangement from June 2004 through November 2004 and chartered in another vessel on a short-term basis to fulfill our obligations under our charter agreements covering the Charleston. We are obligated to use our best efforts to cover all of ExxonMobil's cargo transportation requirements that would have been covered by the S/R Wilmington during future drydocks of that vessel.

        The Charleston is currently and is expected to continue to transport specialty refined petroleum products and related products that generally generate qualifying income for federal income tax purposes. We are operating the Chemical Pioneer in a corporate subsidiary because it primarily will conduct operations that do not generate qualifying income. Dividends received from our corporate subsidiary will generate qualifying income. Section 7704 of the Internal Revenue Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the "Qualifying Income Exception," exists with respect to publicly traded partnerships of which 90% or more of the gross income for every taxable year consists of "qualifying income." Qualifying income includes income and gains derived from the transportation, storage and processing of crude oil, natural gas and products thereof. Other types of qualifying income include interest (other than from a financial business), dividends, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than 3% of our current income is not qualifying income; however, this estimate could change from time to time. We estimate at least 90% of our current gross income constitutes qualifying income.

        Our parcel tankers are required by both domestic (U.S. Coast Guard) and international (International Maritime Organization) regulatory bodies to be drydocked twice in a five year period. During a drydocking the vessel is removed from service (typically for 35 to 50 days) and major repair and maintenance work is carried out. We currently estimate typical drydock costs to be $3.0 million to $5.0 million per vessel for work occurring in U.S. shipyards. Drydocking costs are considered maintenance capital expenditures but are expensed immediately for tax purposes.

(1)

Drydocked in Singapore; includes estimated transit time to and from shipyard in Singapore.

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(2)

Extensive drydock to bring the ship to our operational standards following acquisition. This drydocking substantially improved the operating quality of the ship by, among other things, coating all ballast and void tanks, completely overhauling and upgrading the main propulsion plant, and recoating all deck structures. Also during this drydocking, we conducted extensive work to successfully bring the vessel to CAP II quality.

Articulated Tug Barge Unit

        ATB's, similar to ITBs, consist of a tugboat (which provides propulsion) and a cargo carrying barge using a coupling system that connects the two vessels. Unlike the rigid connection found on ITBs, an ATB uses a hinged connection. The ATB's configuration offers crewing cost advantages similar to those of an ITB. In addition, ATBs offer the additional advantage of substitutability, because the barge and tug may be decoupled. This offers operational and commercial flexibility, allowing the barge unit to be towed by a third party tug in certain situations. ATBs are substantially cheaper to construct than a new tanker.

        In August 2004, we signed a contract with Southeastern New England Marine Corporation, or Senesco, for construction of a 19,999 ton ATB to be delivered in early 2006. This design will enable us to offer our customers a high degree of flexibility in carrying cargos of different grades simultaneously.

        The contract price for the ATB is $45.4 million, including $0.5 million of Partnership supervision costs, to be paid in installments over the construction period of approximately 18 months. The barge will be constructed at Senesco's shipyard at Quonset Point, Rhode Island. Pursuant to the terms of the contract, we have options, exercisable for a period of two years, to build three additional ATBs under the same terms and conditions at fixed prices, subject to specified price increases and increases resulting from changes in specifications and component prices. If we do not exercise any of the options, we must pay the shipyard an additional $375,000, and if we exercise the option only for one additional ATB, we must pay the shipyard $125,000.

        The following table sets forth the specifications and highlights for our ATB currently under construction:

(1)

A vessel's cargo capacity is less than its deadweight capacity as a result of the fuel it carries for its operations.

        We have entered into contracts of affreightment to transport commodity chemical products whose specified minimum volumes will utilize 77% of our ATB's anticipated capacity through September 2007 and approximately 67% of the ATB's anticipated capacity thereafter through June 2010. In addition, these contracts generally require the customer to ship excess volume of the products covered by the contract on the routes covered by the contract on our ATB. As a result, we expect these companies will account for substantially all of the non-committed capacity of this vessel during the term of the contract. We currently intend to secure long-term contracts of affreightment for any additional ATBs constructed pursuant to exercise of the options contained in the contract with Senesco.

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        The contracts of affreightment we have for our ATB under construction cover products that generally do not generate qualifying income for federal income tax purposes. As a result, we anticipate this ATB will be owned by our corporate subsidiary because it primarily will conduct operations that do not generate qualifying income.

Our Customers

        Our three largest customers in 2004 and 2003 based on gross revenue were BP, Hess and Shell, each of which accounted for more than 12% of our consolidated revenues for those periods. No other customer accounted for more than 10% of our consolidated revenues for those periods. See note 3 to the consolidated financial statements in Item 8 of this report.

Preventative Maintenance

        We have a computerized preventative maintenance program that tracks U.S. Coast Guard and American Bureau of Shipping inspection schedules and establishes a system for the reporting and handling of routine maintenance and repair.

        Vessel captains submit monthly inspection reports, which are used to note conditions that may require maintenance or repair. Vessel superintendents are responsible for reviewing these reports, inspecting identified discrepancies, assigning a priority classification and generating work orders. Work orders establish job type, assign personnel responsible for the task and record target start and completion dates. Vessel superintendents inspect repairs completed by the crew, supervise outside contractors as needed and conduct quarterly inspections following the same criteria as the captains. Drills and training exercises are conducted in conjunction with these inspections, which are typically more comprehensive in scope. In addition, an operations duty officer is available on a 24-hour basis to handle any operational issues. The operations duty officer is prepared to respond on scene whenever required and is trained in technical repair issues, spill control and emergency response.

        The American Bureau of Shipping and the U.S. Coast Guard establish drydocking schedules. Prior to sending a vessel to a shipyard, we develop comprehensive work lists to ensure all required maintenance is completed. Repair facilities bid on these work lists, and jobs are awarded based on price and time to complete. Vessels then report to a cleaning facility to prepare for the shipyard. Once the vessel is gas-free, a certified marine chemist issues paperwork certifying that no dangerous vapors are present. The vessel proceeds to the shipyard where the vessel superintendent and certain crew members assist in performing the maintenance and repair work. The planned maintenance period is considered complete when all work has been tested to the satisfaction of American Bureau of Shipping or U.S. Coast Guard inspectors or both.

Safety

General

        We are committed to operating our vessels in a manner that protects the safety and health of our employees, the general public and the environment. Our primary goal is to minimize the number of safety- and health-related accidents on our vessels and our property. We are focused on avoiding personal injuries and reducing occupational health hazards. We seek to prevent accidents that may cause damage to our personnel, equipment or the environment such as fire, collisions, petroleum spills and groundings of our vessels. In addition, we are committed to reduce overall emissions and waste generation from our operations and to the safe management of associated cargo residues and cleaning wastes.

        Our policy is to follow all laws and regulations as required, and we are actively participating with government, trade organizations and the public in creating responsible laws, regulations and standards

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to safeguard the workplace, the community and the environment. Our operations department is responsible for coordinating all facets of our health, safety and training programs. The operations department identifies areas that may require special emphasis, including new initiatives that evolve within the industry. Supervisors are responsible for carrying out and monitoring compliance for all of the safety and health policies on their vessels.

Tank Barge Characteristics

        To protect the environment, today's tank barge hulls are required not only to be leakproof into the body of water in which they float but also to be vapor-tight to prevent the release of any fumes or vapors into the atmosphere. Our tank barges that carry clean products such as gasoline or naphtha have alarms that indicate when the tank is full (95% of capacity) and when it is overfull (98% of capacity). Each tank barge also has a vapor recovery system that connects the cargo tanks to the shore terminal via pipe and hose to return to the plant the vapors generated while loading.

Safety Management Systems

        We are currently certified under the standards of the International Safety Management, or ISM, system. The ISM standards were promulgated by the International Maritime Organization, or IMO, several years ago and have been adopted through treaty by many IMO member countries, including the United States. Although ISM is not required for coastal tug and barge operations, we have determined that an integrated safety management system, including the ISM standards, will promote safer operations and will provide us with necessary operational flexibility as we continue to grow. We have been awarded ISO 9001 Quality Management System certification as well as ISO 14001 Environmental Management System certification. These standards are part of a series of standards established by the International Organization for Standardization. ISO 9001 is one of a series of quality management system standards, while ISO 14001 is one of a series of standards relating to the environment and its protection.

Ship Management, Crewing and Employees

        We maintain an experienced and highly qualified work force of shore-based and seagoing personnel. As of March 1, 2005, we employed approximately 330 persons, comprised of approximately 30 shore staff and approximately 300 fleet personnel. We have a collective bargaining agreement in place with two maritime unions, the American Maritime Officers union, which covers the 134 officers of our vessels, and the Seafarers' International Union, which covers all our other seagoing personnel, that expire in 2007. Under the terms of the collective bargaining agreements, we are required to make contributions to pension and other welfare programs managed by the unions. Management believes there are no unfunded pension liabilities under any of these agreements. Our vessel employees are paid on a daily or hourly basis and typically work 60 days on and 60 days off, in the case of officers, and 120 days on and 60 days off, in the case of all other seagoing personnel. Our shore-based personnel are generally salaried and are primarily located at our headquarters in Edison, New Jersey.

        Our shore staff provides support for all aspects of our fleet and business operations, including sales and scheduling, crewing and human resources functions, engineering, compliance and technical management, financial and insurance services.

        Our crews regularly inspect each vessel, both at sea and in port, and perform most of the ordinary course maintenance. Our procedures call for a member of our shore-based staff to inspect each vessel at least once each fiscal quarter, making specific notations and recommendations regarding the overall condition of the vessel, maintenance, safety and crew welfare. In addition, our fleet is inspected annually by independent safety consultants and regularly vetted by our customers.

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Classification, Inspection and Certification

        In accordance with standard industry practice, all of our coastwise vessels have been certified as being "in class" by the American Bureau of Shipping. The American Bureau of Shipping is one of several internationally recognized classification societies that inspect vessels at regularly scheduled intervals to ensure compliance with American Bureau of Shipping classification rules and some applicable federal safety regulations. Most insurance underwriters require an "in class" certification by a classification society before they will extend coverage to any vessel. The classification society certifies that the pertinent vessel has been built and maintained in accordance with the rules of the society and complies with applicable rules and regulations of the country of registry of such vessel and the international conventions of which that country is a member. Inspections of our ITBs are conducted by a surveyor of the classification society in three surveys of varying frequency and thoroughness: annual surveys each year, an intermediate survey every two to three years, which is generally conducted through an underwater survey, and a special survey every five years. As part of an intermediate survey, our vessels may be required to be drydocked every 24 to 30 months for inspection of the underwater parts of such vessel and for any necessary repair work related to such inspection. Inspections of our parcel tankers are conducted by a surveyor of the classification society annually as well as when the vessel is drydocked, which must occur twice every five years.

        Our vessels are inspected at periodic intervals by the U.S. Coast Guard to ensure compliance with applicable safety regulations issued by the U.S. Coast Guard. All of our tank vessels carry Certificates of Inspection issued by the U.S. Coast Guard.

        Our vessels are also inspected and audited periodically by our customers, in some cases as a precondition to chartering our vessels. We maintain all necessary approvals required for our vessels to operate in their normal trades. We believe that the high quality of our vessels, our crews and our shoreside staff are advantages when competing against other vessel operators for long-term business.

Insurance Program

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

        Our hull and machinery insurance covers risks of actual or constructive loss from collision, fire, grounding, engine breakdown and other casualties up to an agreed value per vessel. Our war-risks insurance covers risks of confiscation, seizure, capture, vandalism, sabotage and other war-related risks. While some tank vessel owners and operators obtain loss-of-hire insurance covering the loss of revenue during extended tank vessel off-hire periods, we, along with several other tank vessel operators, do not have this type of coverage. We believe that, given our diversified marine transportation operations and high utilization rate, this type of coverage is not economical and is of limited value to us. However, we evaluate the need for such coverage on an ongoing basis taking into account insurance market conditions and the employment of our vessels.

        Our protection and indemnity insurance covers third-party liabilities and other related expenses from, among other things, injury or death of crew, passengers and other third parties, claims arising from collisions, damage to cargo, damage to third-party property, asbestos exposure and pollution arising from oil or other substances. Our current protection and indemnity insurance coverage for pollution is $1 billion per incident and is provided by United Kingdom P&I Club, which is a member of the International Group of protection and indemnity mutual assurance associations. The 17 protection and indemnity associations that comprise the International Group insure approximately 90% of the world's commercial tonnage and have entered into a pooling agreement to reinsure each association's

19

liabilities. Each protection and indemnity association has capped its exposure to this pooling agreement at approximately $4.3 billion per non-pollution incident. As a member of UK P&I Club, we are subject to calls payable to the associations based on our claims records, as well as the claim records of all other members of the individual associations and members of UK P&I Club.

        We are not currently the subject of any claims alleging exposure to contaminants, although such claims may be brought in the future. In connection with our purchase of the six ITBs from Hess, we and Hess agreed that we would share liability for any claims by employees for exposure to contaminants including, without limitation, polychlorinated biphenyls, asbestos and radioactive substances, or working conditions on the vessels, based on the number of days such employee worked for Hess compared to the number of days such employee worked for us. If, notwithstanding the foregoing, we had to pay claims solely out of our own funds, it could have a material adverse effect on our financial condition. Furthermore, any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims could be brought, the aggregate amount of these deductibles could be material.

        We may not be able to obtain insurance coverage in the future to cover all risks inherent in our business, and insurance, if available, may be at rates that we do not consider commercially reasonable. In addition, as more single-hull vessels are retired from active service, insurers may be less willing to insure and customers less willing to hire single-hull vessels.

Competition

        The Jones Act restricts U.S. point-to-point maritime shipping to vessels operating under the U.S. flag, built in the United States, at least 75% owned and operated by U.S. citizens and manned by U.S. crews. In our market areas, our primary direct competitors are the operators of U.S. flag ocean-going tank vessels and U.S. flag parcel tankers, including the captive fleets of major oil and chemical companies. The domestic tank vessel industry is highly competitive.

        In the spot charter markets, our vessels compete with all other vessels of a size and type required by a charterer that can be available at the date specified. In the longer-term charter market, competition is based primarily on price and availability, although we believe charterers have become more selective with respect to the quality of vessels they hire, with particular emphasis on factors such as age, double-hulls or double-bottoms and the reliability and quality of operations. We believe major oil and chemical companies are increasingly demonstrating a preference for modern vessels based on concerns about the environmental risks associated with older vessels. Consequently, we believe that owners of large relatively modern fleets such as ours have been able to gain a competitive advantage over owners of older fleets.

        U.S. flag tank vessels also compete with petroleum product pipelines and are affected by the level of imports on foreign flag products carriers. Because the existing U.S. pipeline network offers a low cost method of transporting oil and refined petroleum products, it is capacity constrained in many markets. We believe that high capital costs, tariff regulation and environmental considerations make it unlikely that a new refined product pipeline system will be built in our market areas in the near future. It is possible, however, that new pipeline segments, including pipeline segments that connect with existing pipeline systems, could be built or that existing pipelines could be expanded or converted to carry refined petroleum products. Either of these occurrences could have an adverse effect on our ability to compete in particular locations.

        While a substantial majority of all long-haul shipments of chemicals in the United States are by rail, Wilson Gillette estimates approximately 5% are transported in the coastwise trade by tank vessels, and we believe this percentage would be higher if more Jones Act qualified parcel tankers were available. We believe that the cost to ship by rail is significantly higher than shipping by tanker, even when inventory and logistics costs are factored in. Wilson Gillette believes that this lower cost and the

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availability of vessels with many tank segregations that allow smaller quantities of product to be carried will increase the demand for tanker transportation of chemicals.

Regulation

        Our operations are subject to significant federal, state and local regulation, the principal provisions of which are described below.

Environmental

        General.    Government regulation significantly affects the ownership and operation of our tank vessels. Our tank vessels are subject to international conventions, federal, state and local laws and regulations relating to safety and health and environmental protection, including the generation, storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials. Although we believe that we are in substantial compliance with applicable environmental laws and regulations, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our tank vessels. The recent trend in environmental legislation is toward more stringent requirements, and this trend will likely continue. In addition, a future serious marine incident occurring in U.S. waters or internationally that results in significant oil pollution or causes significant environmental impact could result in additional legislation or regulation that could adversely affect our ability to pay cash distributions.

        Various governmental and quasi-governmental agencies require us to obtain permits, licenses and certificates for the operation of our tank vessels. While we believe that we are in substantial compliance with applicable environmental laws and regulations and have all permits, licenses and certificates necessary for the conduct of our operations, frequently changing and increasingly stricter requirements, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend operation of one or more of our tank vessels.

        We maintain operating standards for all our tank vessels that emphasize operational safety, quality maintenance, continuous training of our crews and officers, care for the environment and compliance with U.S. regulations. Our tank vessels are subject to both scheduled and unscheduled inspections by a variety of governmental and private entities, each of which may have unique requirements. These entities include the local port authorities (U.S. Coast Guard or other port state control authorities), classification societies, flag state administration and charterers, particularly terminal operators and oil companies.

        We manage our exposure to losses from potential discharges of pollutants through the use of well maintained, well managed and well equipped vessels and safety and environmental programs, including a maritime compliance program and our insurance program. Moreover, we believe we will be able to accommodate reasonably foreseeable environmental regulatory changes. However, the risks of substantial costs, liabilities and penalties are inherent in marine operations, including potential criminal prosecution and civil penalties for negligent or intentional discharge of pollutants. As a result, there can be no assurance that any new regulations or requirements or any discharge of pollutants by us will not have a material adverse effect on us.

        The Oil Pollution Act of 1990.    The Oil Pollution Act of 1990, or OPA 90, established an extensive regulatory and liability regime for the protection of the environment from oil spills. OPA 90 affects all vessels trading in U.S. waters, including the exclusive economic zone extending 200 miles seaward. OPA 90 sets forth various technical and operating requirements for tank vessels operating in U.S. waters. In general, all newly-built or converted tankers carrying crude oil and petroleum-based products in U.S. waters must be built with double-hulls. Existing single-hull, double-sided and double-bottomed tank vessels are to be phased out of service between 1995 and 2015 based on their tonnage and age. Under

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the phase-out schedule, two of our six ITBs will be precluded from transporting petroleum and petroleum-based products in the United States by May and June, 2012, an additional two ITBs and the Chemical Pioneer and the Charleston must be phased out of transporting petroleum and petroleum-based products by each of February, March, September and October 2013 and the remaining two ITBs must be phased out of service by June and August, 2014. In order to bring our ITBs into compliance with OPA 90, at a minimum we will be required to retrofit each ITB with double sides. Although the Charleston is not OPA 90 compliant, we believe we will be able to obtain a waiver allowing us to carry refined petroleum products in the vessel's center tanks and non-petroleum-based products in the other tanks. Although the Chemical Pioneer is double-hulled, it is not OPA 90 compliant; however, we believe that a minor modification, that must be made by its mandatory phase-out date in 2013, will bring the Chemical Pioneer into compliance with OPA 90.

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

•

address a "worst case" scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources;



•

describe crew training and drills; and



•

identify a qualified individual with specific authority and responsibility to implement removal actions in the event of an oil spill.

        Our vessel response plans have been accepted by the U.S. Coast Guard, and all of our vessel crew members and spill management team personnel have been trained to comply with these guidelines. In addition, we conduct regular oil-spill response drills in accordance with the guidelines set out in OPA 90. We believe that all of our tank vessels are in substantial compliance with OPA 90.

        Environmental Spill and Release Liability.    OPA 90 and various state laws substantially increased over historic levels the statutory liability of owners and operators of vessels for the discharge or substantial threat of a discharge of oil and the resulting damages, both regarding the limits of liability and the scope of damages. OPA 90 imposes joint and several strict liability on responsible parties, including owners, operators and bareboat charterers, for all oil spill and containment and clean-up costs and other damages arising from spills attributable to their vessels. A complete defense is available only when the responsible party establishes that it exercised due care and took precautions against foreseeable acts or omissions of third parties and when the spill is caused solely by an act of God, act of war (including civil war and insurrection) or a third party other than an employee or agent or party in a contractual relationship with the responsible party. These limited defenses may be lost if the responsible party fails to report the incident or reasonably cooperate with the appropriate authorities or refuses to comply with an order concerning clean-up activities. Even if the spill is caused solely by a third party, the owner or operator must pay removal costs and damage claims and then seek reimbursement from the third party or the trust fund established under OPA 90. Finally, in certain circumstances involving oil spills from tank vessels, OPA 90 and other environmental laws may impose criminal liability on personnel and/or the corporate entity.

        OPA 90 limits the liability of each responsible party for a tank vessel to the greater of $1,200 per gross registered ton or $10 million per discharge. This limit does not apply where, among other things, the spill is caused by gross negligence or willful misconduct of, or a violation of an applicable federal safety, construction or operating regulation by, a responsible party or its agent or employee or any person acting in a contractual relationship with a responsible party.

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

•

natural resource damages and related assessment costs;

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•

real and personal property damages;



•

net loss of taxes, royalties, rents, fees and other lost revenues;



•

net costs of public services necessitated by a spill response, such as protection from fire, safety or health hazards;



•

loss of profits or impairment of earning capacity due to the injury, destruction or loss of real property, personal property and natural resources; and



•

loss of subsistence use of natural resources.

        OPA 90 expanded the pre-existing financial responsibility requirements for tank vessels operating in U.S. waters and requires owners and operators of tank vessels to establish and maintain with the U.S. Coast Guard evidence of their financial responsibility sufficient to meet their potential liabilities imposed by OPA 90. Under the regulations, we may provide evidence of insurance, a surety bond, a guarantee, letter of credit, qualification as a self-insurer or other evidence of financial responsibility. We have provided evidence of insurance under the regulations and have received certificates of financial responsibility from the U.S. Coast Guard for all of our tank vessels subject to this requirement.

        OPA 90 expressly provides that individual states are entitled to enforce their own pollution liability laws, even if inconsistent with or imposing greater liability than OPA 90. There is no uniform liability scheme among the states. Some states have OPA 90-like schemes for limiting liability to various amounts, some rely on common law fault-based remedies and others impose strict and/or unlimited liability on an owner or operator. Virtually all coastal states have enacted their own pollution prevention, liability and response laws, whether statutory or through court decisions, with many providing for some form of unlimited liability. We believe that the liability provisions of OPA 90 and similar state laws have greatly expanded potential liability in the event of an oil spill, even where we are not at fault. Some states have also established their own requirements for financial responsibility. However, in March 2000, the U.S. Supreme Court decided United States v. Locke. In that case, INTERTANKO challenged tank vessel regulations enacted by the State of Washington. The Court struck down several regulations and remanded the case for review of additional regulations. The Court held that the regulation of maritime commerce is generally a federal responsibility because of the need for national and international uniformity, although it noted that states may regulate their own ports and waterways so long as the rules are based on the peculiarities of local waters and do not conflict with federal regulation. As a result of this ruling, at least two states have repealed regulations concerning the operation, manning, construction or design of tank vessels.

        Parties affected by oil pollution may pursue relief from the Oil Spill Liability Trust Fund, absent full recovery by them against a responsible party. Responsible parties may seek contribution from the fund for costs incurred that exceeded the liability limits of OPA 90. The responsible party would need to establish that it is entitled to both a statutory defense against liability and to a statutory limitation of liability to obtain contribution from the fund. If we are deemed a responsible party for an oil pollution incident and are ineligible for contribution from the fund, the costs of responding to an oil pollution incident could have a material adverse effect on our results of operations, financial condition and cash flows. We presently maintain oil pollution liability insurance in an amount in excess of that required by OPA 90. Through our protection and indemnity club, the UK P&I Club, our current coverage for oil pollution is $1 billion per incident. It is possible, however, that our liability for an oil pollution incident may exceed the insurance coverage we maintain.

        We are also subject to potential liability arising under the U.S. Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances, whether on land or at sea. Specifically, CERCLA provides for liability of owners and operators of tank vessel for cleanup and removal of hazardous substances and provides for additional

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penalties in connection with environmental damage. Liability under CERCLA for releases of hazardous substances from vessels is limited to the greater of $300 per gross ton or $5 million per incident unless attributable to willful misconduct or neglect, a violation of applicable standards or rules, or upon failure to provide reasonable cooperation and assistance. CERCLA liability for releases from facilities other than vessels is generally unlimited.

        We are required to show proof of insurance, surety bond, self insurance or other evidence of financial responsibility to pay damages under OPA 90 and CERCLA in the amount of $1,500 per gross ton for vessels, consisting of the sum of the OPA 90 liability limit of $1,200 per gross ton or $10 million per discharge and the CERCLA liability limit of $300 per gross ton or $5 million per discharge. We have satisfied these requirements and obtained a U.S. Coast Guard Certificate of Financial Responsibility. OPA 90 and CERCLA each preserve the right to recover damages under other existing laws, including maritime tort law.

        Water.    The Federal Water Pollution Control Act, also referred to as the Clean Water Act, or CWA, imposes restrictions and strict controls on the discharge of pollutants into navigable waters, and such discharges generally require permits. The CWA provides for civil, criminal and administrative penalties for any unauthorized discharges and imposes substantial liability for the costs of removal, remediation and damages. State laws for the control of water pollution also provide varying civil, criminal and administrative penalties and liabilities in the case of a discharge of petroleum, its derivatives, hazardous substances, wastes and pollutants into state waters. In addition, the Coastal Zone Management Act authorizes state implementation and development of programs of management measures for non-point source pollution to restore and protect coastal waters.

        Solid Waste.    Our operations occasionally generate and require the transportation, treatment and disposal of both hazardous and non-hazardous solid wastes that are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state and local requirements. In August 1998, the EPA added four petroleum refining wastes to the list of RCRA hazardous wastes. In addition, in the course of our tank vessel operations, we engage contractors to remove and dispose of waste material, including tank residue. In the event that such waste is found to be "hazardous" under either RCRA or the CWA, and is disposed of in violation of applicable law, we could be found jointly and severally liable for the cleanup costs and any resulting damages. Finally, the EPA does not currently classify "used oil" as "hazardous waste," provided certain recycling standards are met. However, some states in which we pick up or deliver cargo have classified "used oil" as "hazardous" under state laws patterned after RCRA. The cost of managing wastes generated by tank vessel operations has increased in recent years under stricter state and federal standards. Additionally, from time to time we arrange for the disposal of hazardous waste or hazardous substances at offsite disposal facilities. If such materials are improperly disposed of by third parties, we might still be liable for clean up costs under CERCLA or the equivalent state laws.

        Air Emissions.    The federal Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or CAA, requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas. Our ITBs are equipped with vapor control systems that satisfy these requirements. In addition, in December 1999, the EPA issued a final rule regarding emissions standards for marine diesel engines. The final rule applies emissions standards to new engines beginning with the 2004 model year. In the preamble to the final rule, the EPA noted that it may revisit the application of emissions standards to rebuilt or remanufactured engines, if the industry does not take steps to introduce new pollution control technologies. Finally, the EPA recently entered into a settlement that will expand this rulemaking to include certain large diesel engines not previously

24

addressed in the final rule. Adoption of such standards could require modifications to some existing marine diesel engines and may result in material expenditures.

        The CAA also requires states to draft State Implementation Plans, or SIPs, designed to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Where states fail to present approvable SIPs or SIP revisions by certain statutory deadlines, the federal government is required to draft a Federal Implementation Plan. Several SIPs regulate emissions resulting from barge loading and degassing operations by requiring the installation of vapor control equipment. As stated above, our ITBs are already equipped with vapor control systems that satisfy these requirements. Although a risk exists that new regulations could require significant capital expenditures and otherwise increase our costs, we believe, based upon the regulations that have been proposed to date, that no material capital expenditures beyond those currently contemplated and no material increase in costs are likely to be required.

Coastwise Laws

        Substantially all of our operations are conducted in the U.S. domestic trade, which is governed by the coastwise laws of the United States. The U.S. coastwise laws reserve marine transportation between points in the United States to vessels built in and documented under the laws of the United States (U.S. flag) and owned and manned by U.S. citizens. Generally, an entity is deemed a U.S. citizen for these purposes so long as:

•

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



•

its chief executive officer, by whatever title, its chairman of its board of directors and all persons authorized to act in the absence or disability of such persons are a U.S. citizen;



•

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



•

at least 75.0% of the stock or equity interest and voting power in the corporation is beneficially owned by U.S. citizens free of any trust, fiduciary arrangement or other agreement, arrangement or understanding whereby voting power may be exercised directly or indirectly by non-U.S. citizens; and



•

in the case of a limited partnership, the general partner meets U.S. citizenship requirements for U.S. coastwise trade.

        Because we could lose our privilege of operating our vessels in the U.S. coastwise trade if non-U.S. citizens were to own or control in excess of 25.0% of our outstanding interests or those of our general partner, our limited partnership agreement initially restricts foreign ownership and control of our common and subordinated units, and those of our general partner, to not more than 15.0% of the respective interests.

        There have been repeated efforts aimed at repeal or significant change of the Jones Act. Although we believe it is unlikely that the Jones Act will be substantially modified or repealed, there can be no assurance that Congress will not substantially modify or repeal such laws. Such changes could have a material adverse effect on our operations and financial condition.

Other

        Our vessels are subject to the jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs Service and the U.S. Maritime Administration, as well as subject to rules of private industry organizations such as the American Bureau of Shipping. These agencies and organizations establish safety standards and are authorized to investigate vessels and accidents and to

25

recommend improved maritime safety standards. Moreover, to ensure compliance with applicable safety regulations, the U.S. Coast Guard is authorized to inspect vessels at will.

Occupational Health Regulations

        Our vessel operations are subject to occupational safety and health regulations issued by the U.S. Coast Guard and, to an extent, by the U.S. Occupational Safety and Health Administration. These regulations currently require us to perform monitoring, medical testing and recordkeeping with respect to personnel engaged in the handling of the various cargoes transported by our vessels.

Security

        Heightened awareness of security needs brought about by the events of September 11, 2001 has caused the U.S. Coast Guard, the International Maritime Organization, and the states and local ports to adopt heightened security procedures relating to ports and vessels. We have updated our procedures in light of the new requirements.

        In 2002 Congress passed the Maritime Transportation Security Act of 2002, or MTS Act, which, together with the International Maritime Organization's recent security proposals (collectively known as The International Ship and Port Security Code), requires specific security plans for our vessels and more rigorous crew identification requirements. We have implemented vessel security plans and procedures for each of our vessels pursuant to rules implementing the MTS Act that have been issued by the U.S. Coast Guard.

Vessel Condition

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

ITEM 2.    PROPERTIES

        Our general partner leases approximately 12,700 square feet of office space for our principal executive office in Edison, New Jersey. The lease expires in May 2009. Our general partner also has the option to renew the lease for an additional five-year period.

ITEM 3.    LEGAL PROCEEDINGS

        We are a party to routine, marine-related claims, lawsuits and labor arbitrations arising in the ordinary course of business. All of these claims against us are substantially mitigated by insurance, subject to deductibles ranging up to $150,000 per claim. On a current basis, we provide for amounts we expect to pay.

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PART II.

ITEM 5.    MARKET FOR PARTNERSHIP'S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of Common Units, Distributions and Related Unitholder Matters

        Our common units were listed on the New York Stock Exchange under the symbol "USS" beginning on October 29, 2004. Prior to October 29, 2004, our equity securities were not publicly traded. As of February 28, 2005, there were 6,899,968 outstanding publicly-traded common units, representing an aggregate 49% limited partner interest in us. As of February 28, 2005, there were 7 holders of record of our common units, representing approximately 6,000 beneficial owners. The following table sets forth, for the periods indicated, the high and low sales prices per common unit, as reported on the New York Stock Exchange, and the amount of cash distributions declared per common unit:

(1)

Distributions are shown for the quarter with respect to which they were declared.

(2)

For the period from November 3, 2004, the date of completion of our initial public offering, through December 31, 2004.

        The aggregate amount of distributions declared in respect of the year ended December 31, 2004 on common units, the general partner interests, and subordinated units totaled $4.1 million.

Initial Public Offering

        On November 3, 2004, we completed our initial public offering of 6,000,000 common units at a price of $22.50 per unit, pursuant to a Registration Statement on Form S-1 (Registration No. 333-118141) originally filed on August 12, 2004. The managing underwriters were Lehman Brothers Inc. and Citigroup Inc. At that time, the underwriters exercised their over-allotment option to purchase an additional 899,968 common units. Upon completion of the initial public offering, 6,899,968 common units and 6,899,968 subordinated units were outstanding. Total gross proceeds from these sales were $153.5 million. We used these proceeds to repay $93.8 million in outstanding term debt, provide $24.7 million of working capital, pay $1.3 million of costs associated with amending and restating our credit facility, and redeem the 899,968 common units held by US Shipping Master LLC for $18.6 million. The proceeds we received from the offering and the use of those proceeds through December 31, 2004 are summarized as follows (in thousands, except unit and per unit amounts):

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CASH DISTRIBUTION POLICY

Distributions of Available Cash

        General.    Approximately 45 days after the end of each quarter, beginning with the quarter ending December 31, 2004, we will distribute all of our available cash to unitholders of record on the applicable record date. We prorated the minimum quarterly distribution for the period November 3, 2004 (the completion of the initial public offering) through December 31, 2004 based on the actual length of the period in which the units were outstanding.

        Definition of Available Cash.    Available cash generally means, for each fiscal quarter, all cash on hand at the end of the quarter:

•

less the amount of cash reserves established by our general partner to:



•

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



•

comply with applicable law, any of our debt instruments or other agreements; or



•

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



•

plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter for which the determination is being made. Working capital borrowings are generally borrowings that will be made under our credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.

        We currently expect that our estimated maintenance capital expenditures will initially be $17.2 million per year, which is comprised of approximately $10.2 million per year for mandatory drydocking costs for all of our vessels and approximately $7.0 million per year for retrofitting our ITBs to make them OPA 90 compliant. The amount of estimated maintenance capital expenditures attributable to future drydocking expenses is based on the anticipated costs of drydockings over our next five-year drydocking cycle. Please read "Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Ongoing Capital Expenditures."

Subordination Periods

        General.    During the subordination periods, which we define below, the common units will have the right to receive distributions of available cash from basic surplus, as defined below, in an amount equal to the minimum quarterly distribution of $0.45 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from basic surplus may be made on any subordinated units. Distribution arrearages do not accrue on either class of the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination periods there will be available cash from basic surplus to be distributed on the common units. Our subordinated units are owned by United States Shipping Master LLC. Only the non-management members of United States Shipping Master LLC will be entitled to receive distributions of or attributable to the class A subordinated units. The members of United States Shipping Master that serve as our executive officers will not be entitled to receive distributions of or attributable to the class A subordinated units; the management members will only be entitled to receive distributions of or attributable to the class B subordinated units.

        Definition of Subordination Periods.    The class A subordination period will extend until the first day of any quarter, beginning after December 31, 2009, and the class B subordination period will

28

extend until the first day of any quarter, beginning after December 31, 2010, that each of the following tests are met:

•

distributions of available cash from basic surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;



•

the "adjusted basic surplus" (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2% general partner interest during those periods; and



•

there are no arrearages in payment of the minimum quarterly distribution on the common units.

If the unitholders remove the general partner without cause, the subordination periods may end early.

        Early Conversion of Class A Subordinated Units.    Before the end of the class A subordination period, up to 50% of the class A subordinated units, or up to 2,636,171 class A subordinated units, may convert into common units on a one-for-one basis immediately after the distribution of available cash to the partners in respect of any quarter ending on or after:

(1)

December 31, 2007 with respect to 25% of the class A subordinated units; and



(2)

December 31, 2008 with respect to a further 25% of the class A subordinated units (based on the total amount of class A subordinated units initially issued).

        The early conversions of the class A subordinated units will occur if at the end of the applicable quarter each of the following three tests is met:

•

distributions of available cash from basic surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;



•

the adjusted basic surplus generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2% general partner interest during those periods; and



•

there are no arrearages in payment of the minimum quarterly distribution on the common units.

        However, the second early conversion of the second 25% of the class A subordinated units may not occur until at least one year following the early conversion of the first 25% of the class A subordinated units.

        Early Conversion of Class B Subordinated Units.    Before the end of the class B subordination period, up to 50% of the class B subordinated units, or up to 813,814 class B subordinated units, may convert into common units on a one-for-one basis immediately after the distribution of available cash to the partners in respect of any quarter ending on or after:

(1)

December 31, 2008 with respect to 25% of the class B subordinated units; and



(2)

December 31, 2009 with respect to a further 25% of the class B subordinated units (based on the total amount of the class B subordinated units initially issued).

29

        Each early conversion of the class B subordinated units will occur if at the end of the applicable quarter each of the following three tests is met:

•

distributions of available cash from basic surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for (1) each of the four consecutive, non-overlapping four-quarter periods immediately preceding the date of the early conversion of the first 25% of class B subordinated units and (2) each of the three consecutive, non-overlapping four-quarter periods immediately preceding the date of the early conversion of the second 25% of the class B subordinated units;



•

the adjusted basic surplus generated during (1) each of the four consecutive, non-overlapping four-quarter periods immediately preceding the date of the early conversion of the first 25% of class B subordinated units or (2) each of the three consecutive, non-overlapping four-quarter periods immediately preceding the date of the early conversion of the second 25% of the class B subordinated units, equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2% general partner interest during those periods; and



•

there are no arrearages in payment of the minimum quarterly distribution on the common units.

        However, the second early conversion of the second 25% of the class B subordinated units may not occur until at least one year following the early conversion of the first 25% of the class B subordinated units.

        Accelerated Early Conversion of Class B Subordinated Units.    Notwithstanding the foregoing, 25% of the class B subordinated units may convert into common units on a one-for-one basis immediately after the distribution of available cash to the partners in respect of any quarter ending on or after December 31, 2007 if:

•

each of the three tests set forth in the bullet points under the caption "Early Conversion of Class A Subordinated Units" above is met as of such date; and



•

the adjusted basic surplus generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of $2.43 on each of the outstanding common units and subordinated units during that period on a fully diluted basis and the related distribution on the 2% general partner interest during that period.

        In addition, a further 25% of the class B subordinated units may convert into common units on a one-for-one basis immediately after the distribution of available cash to the partners in respect of any quarter ending on or after December 31, 2008 if each of the tests in the two bullet points immediately set forth above are met. Finally, if the test set forth in the second bullet immediately set forth above is met for any four-quarter period ending on or after December 31, 2009 and all class A subordinated units have been converted into common units, then the remaining class B subordinated units will convert into common units.

        For purposes of determining whether sufficient adjusted basic surplus has been generated under these conversion tests, the conflicts committee may adjust adjusted basic surplus upward or downward if it in good faith determines that the estimated amount of maintenance capital expenditures used in the determination of basic surplus was materially incorrect, based on circumstances prevailing at the time of original determination of the estimate.

        Definition of Basic Surplus.    Basic surplus in any period generally means:

•

our cash balance at November 3, 2004, the closing date of our initial public offering, (approximately $24.7 million, consisting of the net proceeds of our initial public offering used to provide working capital); plus

30

•

$10 million (as described below); plus



•

all of our cash receipts after the closing of our initial public offering, including all amounts received from Amerada Hess Corporation pursuant to the Hess support agreement but excluding (1) cash from borrowings, other than working capital borrowings and the tax loan from our general partner, (2) sales of equity and debt securities and (3) sales or other dispositions of assets outside the ordinary course of business; plus



•

working capital borrowings made after the end of a quarter but before the date of determination of basic surplus for the quarter; plus



•

interest paid on debt incurred and cash distributions paid on equity securities issued, in each case, to finance all or any portion of the construction of a capital improvement or replacement asset, such as a new vessel or the retrofitting of an ITB, during the period from such financing until the earlier to occur of the completion of construction or the abandonment or disposal of the capital improvement; plus



•

interest paid on debt incurred and cash distributions paid on equity securities issued, in each case, to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued to finance the construction projects described in the immediately preceding bullet; less



•

all of our operating expenditures after the closing of our initial public offering, including all amounts paid to Amerada Hess Corporation pursuant to the Hess support agreement, the repayment of working capital borrowings and the repayment of the tax loan from our general partner, but not (1) the repayment of other borrowings, (2) actual maintenance capital expenditures or (3) expansion capital expenditures; less



•

estimated maintenance capital expenditures and the amount of cash reserves established by our general partner for future operating expenditures.

        As described above, basic surplus does not reflect actual cash on hand at closing that is available for distribution to our unitholders. For example, it includes a provision that will enable us, if we choose, to distribute as basic surplus up to $10 million of cash we receive in the future from non-operating sources, such as the sale of a vessel, issuances of securities and long-term borrowings, that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity securities or interest payments on debt in basic surplus would be to increase basic surplus by the amount of any such cash distributions or interest payments. As a result, we may also distribute as basic surplus up to the amount of any such cash distributions or interest payments of cash we receive from non-operating sources.

        Definition of Adjusted Basic Surplus.    Adjusted basic surplus generally means:

•

basic surplus generated with respect to that period; less



•

any net increase in working capital borrowings with respect to that period; less



•

any net reduction in cash reserves for operating expenditures made with respect to that period not relating to an operating expenditure made with respect to that period; plus



•

any net decrease in working capital borrowings with respect to that period; plus



•

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

        Adjusted basic surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of

31

reserves of cash generated in prior periods. Support payments we receive from Hess are included in adjusted basic surplus.

        Effect of Expiration of the Subordination Periods.    Upon expiration of the class A subordination period and class B subordination period, each outstanding class A subordinated unit and class B subordinated unit, respectively, will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the unitholders remove our general partner other than for cause and units held by our general partner and its affiliates are not voted in favor of such removal:

•

the subordination periods will end and each subordinated unit will immediately convert into one common unit;



•

any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and



•

our general partner will have the right to convert its general partner interest and, if any, its incentive distribution rights into common units or to receive cash in exchange for those interests.

Incentive Distribution Rights

        Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from basic surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.

        If for any quarter:

•

we have distributed available cash from basic surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and



•

we have distributed available cash from basic surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from basic surplus for that quarter among the unitholders and our general partner in the following manner:

•

first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives a total of $0.50 per unit for that quarter (the "first target distribution");



•

second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives a total of $0.575 per unit for that quarter (the "second target distribution");



•

third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives a total of $0.70 per unit for that quarter (the "third target distribution"); and



•

thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

        In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution. The percentage interests set forth above for our general partner include its 2% general partner interest and assume the general partner has not transferred the incentive distribution rights.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth selected historical financial data and operating data of U.S. Shipping Partners L.P. and its predecessors. On November 3, 2004, United States Shipping Master LLC contributed substantially all its assets and liabilities constituting its business to us in connection with our initial public offering of common units. Therefore, our historical financial and operating data presented below are for United States Shipping Master LLC for all periods prior to November 3, 2004. The following table should be read in conjunction with the consolidated financial statements, including notes thereto, in Item 8 of this report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.

        The following table presents a non-GAAP financial measure, EBITDA, which we use in our business. This measure is not calculated or presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"). We explain this measure below and reconcile it to its most directly comparable financial measure calculated and presented in accordance with GAAP in "Non-GAAP Financial Measure" below.

        The following table summarizes our results of operations for the periods presented (in thousands, except per unit data):

33

(1)

Although the predecessor of U.S. Shipping Partners L.P. was formed on July 16, 2002, it did not commence operations until it acquired the six ITBs from Hess on September 13, 2002.

(2)

See "—Non-GAAP Financial Measure" below.

(3)

Represents distributions made in respect of the period from November 3, 2004, the date we closed our initial public offering, through December 31, 2004.

(4)

"Net utilization" is a percentage equal to the total number of days actually worked by a group of vessels during a defined period, divided by the number of calendar days in the period multiplied by the number of vessels operating in the period.

(5)

"Average Daily Time Charter Equivalent," or TCE, equals the net voyage revenue earned by a vessel or group of vessels during a defined period, divided by the total number of days actually worked by that vessel or group of vessels during that period. We principally use net voyage revenue, rather than voyage revenue, when comparing performance in different periods. We derive our voyage revenue from time charters, contracts of affreightment, consecutive voyage charters and spot charters, which are described in more detail in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." One of the principal distinctions among these types of contracts is whether the vessel operator or the customer pays for voyage expenses, which include fuel, port charges, pilot fees, tank cleaning costs and canal tolls. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the vessel operator, pay the voyage expenses, we typically pass these expenses on to our customers by charging higher rates under the contract. As a result, although voyage revenue from different types of contracts may vary, the net revenue that remains after subtracting voyage expenses, which we call net voyage revenues, is comparable across the different types of contracts.

(6)

For 2000, 2001, and the period from January 1, 2002 through September 12, 2002, does not include the one ITB that the Catug Group chartered to another division of Hess at a rate less than the market rate.

(7)

Since November 6, 2003 for the Chemical Pioneer. From May 6, 2003, the date we acquired the vessel, until July 5, 2003, the Chemical Pioneer was bareboat chartered to a third party and from July 6, 2003 to November 5, 2003 the Chemical Pioneer was in drydock. Since April 28, 2004, the date of acquisition, for the Charleston.

34

Non-GAAP Financial Measure

        EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and our banks, to assess:

•

the financial performance of our assets without regard to financing methods, capital structures or historical cost basis;



•

the ability of our assets to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners;



•

our operating performance and return on invested capital as compared to those of other companies in the marine transportation business, without regard to financing methods and capital structure; and



•

our compliance with certain financial covenants included in our debt agreements.

        EBITDA should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies. Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies.

•

EBITDA does not reflect our capital expenditures or future requirements for capital expenditures or contractual commitments;



•

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;



•

EBITDA does not reflect the significant interest expense, or the cash requirement necessary to service interest or principal payments, on our debts;



•

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and



•

Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following is a discussion of the historical consolidated financial condition and results of operations of U.S. Shipping Partners L.P. and, prior to our November 3, 2004 initial public offering, of our predecessor company, United States Shipping Master LLC and its predecessors, and should be read in conjunction with our historical consolidated financial statements and notes thereto included elsewhere in this report.

Overview

        We are a leading provider of long-haul marine transportation services, principally for refined petroleum products, in the U.S. domestic "coastwise" trade. We are also involved, to a limited extent, in the coastwise transportation of petrochemical and commodity chemical products. Marine transportation is a vital link in the distribution of refined petroleum, petrochemical and commodity chemical products in the United States, with approximately 28% of domestic refined petroleum products being transported by water in 2002. Our fleet consists of eight tank vessels: six integrated tug barge units, or ITBs, and two specialty refined petroleum and chemical product, or parcel, tankers. Our primary customers are major oil and chemical companies. A significant portion of our fleet capacity is currently committed to these companies pursuant to contracts with initial terms of one year or more, which provides us with a relatively predictable level of cash flow. We do not assume ownership of any of the products that we transport on our vessels.

        Our market is largely insulated from direct foreign competition because the Merchant Marine Act of 1920, commonly referred to as the Jones Act, restricts U.S. point-to-point maritime shipping to vessels operating under the U.S. flag, built in the United States, at least 75% owned and operated by U.S. citizens and manned by U.S. crews. All of our vessels are qualified to transport cargo between U.S. ports under the Jones Act.

        We began operations in September 2002 when we acquired our six ITBs from a division of Amerada Hess Corporation ("Hess") that was managed by several executive officers of our general partner. Our six ITBs primarily transport clean refined petroleum products, such as gasoline, diesel fuel, heating oil, jet fuel and lubricants, from refineries and storage facilities to a variety of destinations, including other refineries and distribution terminals. Four of our ITBs are currently operating under contracts with Hess, BP and Shell, one of which expires in September 2005 and one of which expires in January 2006, with the remaining two expiring in late 2006. Our remaining two ITBs are currently operating in the spot market. Regardless of our contract rates and rates in the spot market, we are assured specified minimum charter rates for our ITBs through September 13, 2007, subject to certain limited exceptions, pursuant to a support agreement we entered into with Hess in connection with our acquisition of the six ITBs.

        Our two parcel tankers, the Chemical Pioneer and the Charleston, which we acquired in May 2003 and April 2004, respectively, primarily transport specialty refined petroleum, petrochemical and commodity chemical products, such as lubricants, paraxylene, caustic soda and glycols, from refineries and petrochemical manufacturing facilities to other manufacturing facilities or distribution terminals. We have contracts with Dow Chemical, ExxonMobil, Koch Industries, Lyondell Chemical and Shell with specified minimum volumes that will, in aggregate, account for approximately 74% of the anticipated usable capacity of the Charleston through July 2007 and 75% of the anticipated usable capacity of the Chemical Pioneer through February 2007. In addition, these customers are required to ship on our parcel tankers any additional volume of these products stipulated in the contracts. As a result, we expect these companies will utilize substantially all of the non-committed capacity of these vessels during those periods.

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        In August 2004, we signed a fixed-price contract for construction of a 19,999 ton articulated tug barge unit, or ATB, which is scheduled to be delivered in early 2006. We have entered into contracts to carry commodity chemical products with specified minimum cargo volumes that will utilize approximately 77% of the ATB's anticipated capacity through September 2007 and approximately 67% of the ATB's anticipated capacity thereafter through June 2010. If delivery of the ATB is delayed, we anticipate that we will either use available cargo capacity on one of our vessels or charter additional vessels to meet our contractual obligations pending delivery of the ATB. Our ATB construction contract also provides us with options to purchase three additional ATBs over the next 24 months at fixed prices, subject to limited exceptions.

        We generate revenue by charging customers for the transportation and distribution of their products utilizing our vessels. These services are generally provided under the following four basic types of contractual relationships:

•

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



•

contracts of affreightment, which are contracts to provide transportation services for products over a specific trade route, generally for one or more years, at a negotiated rate per ton;



•

consecutive voyage charters, which are charters for a specified period of time at a negotiated rate per ton; and



•

spot charters, which are charters for shorter intervals, usually a single round-trip, that are made on either a current market rate or lump sum contractual basis.

The principal difference between contracts of affreightment and consecutive voyage charters is that in contracts of affreightment the customer is obligated to transport a specified minimum amount of product on our vessel during the contract period, while in a consecutive voyage charter the customer is obligated to fill the contracted portion of the vessel with its product every time the vessel calls at its facility during the contract period and, if the customer does not have product ready to ship, it must pay us for idle time.

        The table below illustrates the primary distinctions among these types of contracts:

        For the years ended December 31, 2004 and 2003, we derived approximately 82% and 75%, respectively, of our revenue under time charters, consecutive voyage charters and contracts of affreightment, and approximately 18% and 25%, respectively, of our revenue from spot charters.

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

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SIGNIFICANT EVENTS DURING 2004

Initial Public Offering

        On July 30, 2004, the Partnership was formed to own and operate the petroleum, refined petroleum, and chemical product marine transportation, distribution and logistics business conducted by United States Shipping Master LLC. On November 3, 2004, United States Shipping Master LLC contributed substantially all of its assets and liabilities to the Partnership in connection with the initial public offering of common units representing limited partner interests in the Partnership (the "common units"). In exchange for these assets and liabilities, United States Shipping Master LLC received 899,968 common units and 6,899,968 subordinated units representing limited partner interests in the Partnership.

        On November 3, 2004, the Partnership completed its initial public offering of 6,899,968 common units (including 899,968 common units sold upon exercise of the underwriters' over-allotment option) at a price of $22.25 per unit. Total gross proceeds from this sale were $153.5 million, before underwriting and structuring fees of $10.9 million, and offering costs of approximately $4.2 million. The Partnership used proceeds to repay $93.8 million in outstanding term debt, provide $24.7 million of working capital, pay $1.3 million of costs associated with amending and restating our credit facility, and redeem the 899,968 common units held by United States Shipping Master LLC for $18.6 million. See "Item 5. Market for Partnership's Common Equity, Related Security Holder Matters, and Issuer Purchases of Equity Securities".

        At the closing of the initial public offering, the Partnership entered into a second amended and restated credit agreement that provides for a $100 million term loan and the ability to borrow up to an additional $120 million of term loans under certain circumstances. Principal and interest is due and payable quarterly. The term loan matures on April 30, 2010. The credit agreement also provides a $50 million revolving credit facility which expires November 2, 2009. The loans are collateralized by all the Partnership's assets including eight vessels owned by the Partnership. The second amended and restated credit facility contains various financial covenants including certain restrictions on the sale or acquisition of assets and a requirement to adhere to specified financial ratios. See "—Second Amended and Restated Credit Facility" for more information about this credit facility.

Definitions

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

•

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



•

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

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•

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



•

Vessel operating expenses. We pay the vessel operating expenses regardless of whether we are operating under a time charter, contract of affreightment, consecutive voyage charter or spot charter. The most significant direct vessel operating expenses are crewing costs, vessel maintenance and repairs, bunkers and lube oils and marine insurance.



•

Depreciation and amortization. We incur fixed charges related to the depreciation of the historical cost of our fleet to salvage value and the amortization of expenditures for drydockings. The aggregate number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures.



•

General and administrative expenses. General and administrative expenses consist of employment costs for shoreside staff and cost of facilities, as well as legal, audit and other administrative costs. After our initial public offering, we expect to incur approximately $1.7 million in additional annual general and administrative expenses related to being a publicly traded partnership.



•

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



•

Days worked. Days worked are equal to total vessel days less drydocking days and days off-hire.



•

Drydocking days. Drydocking days are days designated for the inspection and survey of vessels, and resulting maintenance work, as required by the U.S. Coast Guard and the American Bureau of Shipping to maintain the vessels' qualification to work in the U.S. coastwise trade. Both domestic (U.S. Coast Guard) and international (International Maritime Organization) regulatory bodies require that our ITBs be drydocked for major repair and maintenance every five years, with a mid-period underwater survey in lieu of drydocking, and our parcel tankers be drydocked twice every five years. Drydocking days also include unscheduled instances where vessels may have to be drydocked in the event of accidents or other unforeseen damage.



•

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



•

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

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP. In preparing these financial statements, we are required to make certain estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of our assets and liabilities, including the disclosure of contingent assets and

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liabilities, at the date of the financial statements and the reported amounts of our revenues and expenses during the periods presented. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable at the time the estimates and assumptions are made. However, future events and their effects cannot be predicted with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from these estimates and assumptions under different circumstances or conditions, and such differences may be material to the financial statements. We believe that, of our significant accounting policies discussed in Note 3 to our consolidated financial statements, the following may involve a higher degree of judgment.

Revenue Recognition

        We earn revenue under contracts of affreightment, spot charters, consecutive voyage charters and time charters. For contracts of affreightment, spot charters and consecutive voyage charters, revenue and voyage expenses are recognized based upon the relative transit time in each period. Although contracts of affreightment, consecutive voyage charters and certain contracts for spot charters may be effective for a period in excess of one year, revenue is recognized on the basis of individual voyages, which are generally less than 15 days in duration. For time charters, revenue is recognized on a daily basis over the contract period, with expenses recognized as incurred.

Depreciation and Amortization

        Vessels and equipment are recorded at cost, including transaction fees where appropriate, and depreciated to salvage value using the straight-line method as follows: ITBs to their mandatory retirement as required by OPA 90, between 2012 and 2014; and 10 years for parcel tankers. We capitalize expenditures incurred for drydocking and amortize these expenditures over 60 months for our ITBs and 30 months for our parcel tankers. The aggregate number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed.

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

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

Accounts Receivable

        We extend credit to our customers in the normal course of business. We regularly review our accounts, estimate the amount of uncollectible receivables each period and establish an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts,

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information about the current financial strength of customers and other relevant information known. Historically, credit risk with respect to our trade receivables has generally been considered minimal because of the financial strength of our customers.

Deferred Income Taxes

        We provide deferred taxes for the tax effects of differences between the financial reporting and tax bases of assets and liabilities of our corporate subsidiary, which are recorded at enacted tax rates in effect for the years in which the differences are projected to reverse. A valuation allowance is provided, if necessary, for deferred tax assets that are not expected to be realized.

Results of Operations

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

(1)

Although the predecessor of the Partnership was formed on July 16, 2002, it did not commence operations until it acquired the six ITBs from Hess on September 13, 2002.

(2)

For the period January 1, 2002 through September 12, 2002, does not include the one ITB that the Catug Group chartered to another division of Hess at a rate less than the market rate.

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(3)

Since November 6, 2003 for the Chemical Pioneer. From May 6, 2003, the date we acquired the vessel, until July 5, 2003, the Chemical Pioneer was bareboat chartered to a third party and from July 6, 2003 to November 5, 2003 the Chemical Pioneer was in drydock. Since April 28, 2004, the date of acquisition, for the Charleston.

(1)

Net voyage revenue is equal to voyage revenue less voyage expenses. Net voyage revenue is a non-GAAP financial measure that we use in our business to improve the comparability of reported revenues in different periods that are generated by different forms of contracts. Net voyage revenue is not calculated or presented in accordance with GAAP.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

        Voyage Revenue.    Voyage revenue was $122.4 million for the year ended December 31, 2004, an increase of $41.8 million, or 52%, as compared to voyage revenue of $80.5 million for the year ended December 31, 2003. Voyage revenue excluding voyage expenses was $101.9 million for the year ended December 31, 2004, an increase of $31.3 million, or 44%, as compared to the year ended December 31, 2003. The Chemical Pioneer, which we purchased in May 2003, contributed $2.4 million of voyage revenue, including $0.3 million under a bareboat charter in the year ending December 31, 2003, and contributed $16.6 million of voyage revenue in 2004. The Charleston, which we purchased in April 2004, contributed $12.5 million of voyage revenue. In August 2004, we time chartered a parcel tanker, which contributed $4.5 million of voyage revenue to fulfill our obligations under contracts of affreightment. The remaining increase in 2004 is primarily a result of more of our vessels operating under contracts where we paid the voyage expenses but received higher freight rates to compensate us for bearing these expenses.

        Vessel Operating Expenses.    Vessel operating expenses were $47.1 million for the year ended December 31, 2004, an increase of $14.0 million, or 42%, as compared to $33.1 million for the year ended December 31, 2003. The Chemical Pioneer, which was purchased in May 2003, was in drydock until November 2003 and the Charleston, which we did not own in 2003, accounted for $10.3 million, or 74%, of the increase in vessel operating expenses for the year ended December 31, 2004. In August 2004, we time chartered a parcel tanker to fulfill our obligations under contracts of affreightment resulting in increased vessel operating expenses of $4.0 million for the year ended December 31, 2004.

        Voyage Expenses.    Voyage expenses were $20.4 million for the year ended December 31, 2004, an increase of $10.5 million, or 106%, as compared to voyage expenses of $9.9 million for the year ended December 31, 2003. Voyage expenses as a percentage of voyage revenue increased from 12.3% in the year ended December 31, 2003 to 16.7% in the year ended December 31, 2004. In August 2004, we time chartered a parcel tanker to fulfill our obligations under contracts of affreightment resulting in increased voyage expenses of $1.1 million for the year ended December 31, 2004. The remaining increase in voyage expenses, both in dollars and as a percentage of voyage revenue, was the result of

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one additional ITB being employed in the spot market during 2004, where we paid voyage expenses and received higher freight rates to compensate us for bearing these expenses.

        General and Administrative Expenses.    General and administrative expenses were $10.3 million for the year ended December 31, 2004, an increase of $3.2 million, or 44%, compared to $7.2 million for the year ended December 31, 2003. In November 2004 we paid a $2.3 million bonus to management and staff in connection with the closing of our public offering and in April 2004 we paid a $0.4 million bonus to management in connection with the purchase of the Charleston. Additionally, incremental costs of $1.0 million associated with being a public entity, including quarterly and annual reporting requirements, tax returns and schedule K-1 preparation were incurred for the year ended December 31, 2004. For the first 38 days of 2003, we utilized office space and other administrative services at Amerada Hess' New Jersey headquarters at no charge. General and administrative expenses include management fees of $0.6 million paid to an affiliate of Sterling Investment Partners, L.P. in the years ended December 31, 2004 and 2003.

        Depreciation and Amortization.    Depreciation and amortization was $23.9 million for the year ended December 31, 2004, an increase of $6.0 million, or 34%, as compared to $17.9 million for the year ended December 31, 2003. This increase is due to the amortization of the capitalized drydock expenditures for, and depreciation of, the Chemical Pioneer, which we acquired in May 2003 and drydocked in July 2003, and depreciation of the Charleston, which we acquired in April 2004.

        Interest Expense.    Interest expense was $10.0 million for the year ended December 31, 2004, a decrease of $79 thousand, or 1%, as compared to $10.0 million for the year ended December 31, 2003. Although we increased our borrowings in July 2003 to finance the drydocking, pay a portion of the purchase price and provide working capital for the operation of the Chemical Pioneer in 2003, we had lower outstanding loan balances during the first quarter of 2004 due to scheduled amortization of debt during 2003 and lower interest rates. In April 2004, we amended our then existing credit facility and increased our debt outstanding to purchase the Charleston but at lower interest rates. Additionally, in November 2004 we amended our then existing credit facility in connection with the closing of our initial public offering and utilized proceeds to reduce our debt balance by $93.8 million, resulting in reduced interest expense.

        Loss on Debt Extinguishment.    During 2004, we refinanced our credit facility in April and November resulting in a $6.4 million loss on debt extinguishment. This represents write-off of certain transaction fees associated with the debt that was repaid as well as certain other costs incurred in the transaction. In April 2004, we amended and restated our then existing credit facility, resulting in a $3.2 million charge, and used the proceeds to repay higher interest rate debt. In November 2004, we amended and restated our then existing credit facility, resulting in a $3.2 million charge, in connection with the closing of our initial public offering.

        Provision for Income Taxes.    A provision of $3.2 million resulted principally from the recording of deferred taxes relating to the change in the structure of one of our subsidiaries to a corporation. The corporate subsidiary consists of the Chemical Pioneer and its results of operations. This subsidiary is subject to federal and state income taxes. This provision was partially offset by a net benefit of $0.1 million that arose from operating results of our corporate subsidiaries.

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        Net Income.    Net income was $1.4 million for the year ended December 31, 2004, a decrease of $1.0 million, or 40%, as compared to $2.4 million for the year ended December 31, 2003. This decrease is the result of the $3.1 million provision for income taxes resulting primarily from a change in the structure of one of our subsidiaries to a corporation, a loss on debt extinguishment of $6.4 million, coupled with increased general and administrative, vessel operating and voyage expenses. This decrease is partially offset by increased operating income as the result of the inclusion of the Chemical Pioneer and Charleston in 2004, as well as higher charter rates under certain of our contracts in 2004.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

        Voyage Revenue.    Voyage revenue was $80.5 million for the year ended December 31, 2003, an increase of $16.0 million, or 25%, as compared to voyage revenue of $64.5 million for the year ended December 31, 2002. The voyage revenue for the period January 1, 2002 through September 12, 2002 (the "2002 Pre-Acquisition Period") was $44.8 million and voyage revenue for the period July 16, 2002 through December 31, 2002 (the "2002 Post-Acquisition Period") was $19.7 million. Although the predecessor of United States Shipping Master LLC was formed on July 16, 2002, it did not commence operations until it acquired the six ITBs from Hess on September 13, 2002.

        The increase in 2003 was primarily due to expiration of time charters for two ITBs in June and August 2002. These vessels were employed in the spot market in 2003 at a time charter equivalent rate higher than the rate received under the time charters, which resulted in additional voyage revenue in 2003. Rate escalations in time charter contracts for two ITBs also increased voyage revenue in 2003. Charterers paid $1.2 million in additional charter hire payments in 2003 for vessel modifications made by us, which amounts we expensed. In addition, during the 2002 Pre-Acquisition Period one ITB was chartered to another division of Hess at a rate less than the market rate. The Chemical Pioneer, which we purchased in May 2003, generated $2.4 million of voyage revenue in 2003, including $0.3 million from a bareboat charter of the vessel prior to its drydock in July 2003. The increase in our voyage revenue in the 2002 Post-Acquisition Period and in 2003 was partially the result of more of our vessels operating under contracts where we paid the voyage expenses but received higher freight rates to compensate us for bearing these expenses.

        Two ITBs were in drydock and, therefore, out of service for 115 days in 2002, which we estimate reduced 2002 revenue by $2.2 million. One ITB was in drydock for approximately 40 days during the 2002 Pre-Acquisition Period (during which the Catug Group did not earn revenue on the vessel) and 24 days during the 2002 Post-Acquisition Period, while the other ITB was in drydock for approximately 51 days during the 2002 Post-Acquisition Period. We purchased the Chemical Pioneer on May 6, 2003 and it was placed on a bareboat charter to Dow Chemical for $4,657 per day, or $0.3 million in aggregate, until the vessel was drydocked in July 2003. The drydock was completed in November 2003 and the Chemical Pioneer operated under contracts of affreightment for the remainder of the year.

        Vessel Operating Expenses.    Vessel operating expenses were $33.1 million for the year ended December 31, 2003, a decrease of $3.0 million, or 8%, as compared to total vessel operating expenses of $36.1 million for 2002. The 2002 Pre-Acquisition Period vessel operating expenses were $28.4 million and 2002 Post-Acquisition Period vessel operating expenses were $7.8 million. Vessel operating expenses decreased principally due to the inclusion of $4.2 million of lease operating expense for one ITB and drydock expense of $3.6 million in the 2002 Pre-Acquisition Period. Hess estimated the cost of future drydocking expenses and accrued these expenses evenly over a five-year period. Our policy is to capitalize drydock expenditures as incurred and to amortize these costs over the vessel's drydock cycle. Hess leased one ITB during the 2002 Pre-Acquisition Period, which it purchased in connection with the sale of the six ITBs to us. The decrease in operating expense in 2003 was partially offset by the inclusion of $2.5 million of expense from the operation of the Chemical Pioneer following its acquisition in May 2003 and by the increase of union labor and benefit costs and vessel insurance expense. Vessel operating expenses as a percentage of voyage revenue were 41.2% in 2003, compared to 63.3% for the

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2002 Pre-Acquisition Period and 39.4% for the 2002 Post-Acquisition Period. The changes in the percentage of operating expense as compared to voyage revenue is the result of the previously noted difference in accounting for drydock expense and the inclusion of operating lease expense in the 2002 Pre-Acquisition Period, as well as the fact that in the 2002 Post-Acquisition Period and 2003 more of our vessels were operating under contracts where we paid the voyage expenses but received higher freight rates to compensate us for bearing these expenses, which increased our voyage revenue, partially offset by the operation of the Chemical Pioneer in 2003.

        Voyage Expenses.    Voyage expenses were $9.9 million for the year ended December 31, 2003, an increase of $4.8 million, or 94%, as compared to total voyage expenses of $5.1 million for the year ended December 31, 2002. The 2002 Pre-Acquisition Period voyage expenses were $2.7 million and the 2002 Post-Acquisition Period expenses were $2.4 million. Voyage expenses as a percentage of voyage revenue was 6.1% in the 2002 Pre-Acquisition Period, 12.1% in the 2002 Post-Acquisition Period and 12.3% in 2003. The increase in voyage expenses, both in dollars and as a percentage of voyage revenue, in 2003 and the 2002 Post-Acquisition Period was primarily due to three ITBs coming off time charter, where the customers pays the voyage expenses, and operating under spot charters or contracts of affreightment, where we pay the voyage expenses. The increase in voyage expenses was partially offset by the fact that during the 2002 Pre-Acquisition Period one ITB was chartered to another division of Hess pursuant to a contract of affreightment, while during the 2002 Post-Acquisition Period and 2003 that ITB was operated under a time charter with Hess.

        General and Administrative Expenses.    General and administrative expenses were $7.2 million for 2003, an increase of $2.3 million, or 47%, as compared to total general and administrative expenses of $4.9 million for 2002. The 2002 Pre-Acquisition Period general and administrative expenses were $2.7 million and 2002 Post-Acquisition Period general and administrative expenses were $2.2 million. The increase in 2003 was attributable to management fees of $0.2 million and $0.6 million paid to an affiliate of Sterling Investment Partners, L.P. in the 2002 Post-Acquisition Period and 2003, respectively, office rent of $0.2 million in 2003, bonuses to the management and staff of $1.4 million in 2003 and increased staffing costs of $0.3 million as a result of our increased operations. In the 2002 Pre-Acquisition Period, the use of office space and charges for other administrative services was charged to the Catug Group on an intercompany basis. Hess provided all required financial, legal, risk management, human resources and management information system services to the Catug Group. The fees charged for these services were based upon the estimated level of time expended by the functional units and volume-related charges for information systems activities. In the 2002 Post-Acquisition Period and the first 38 days of 2003, we were able to utilize office space and other administrative services at Hess' New Jersey headquarters at no charge. We relocated to our own office space in February 2003.

        Depreciation and Amortization.    Depreciation and amortization was $17.9 million for the year ended December 31, 2003, an increase of $10.2 million, or 131%, as compared to total depreciation and amortization of $7.8 million for the fiscal year ended December 31, 2002. The 2002 Pre-Acquisition Period depreciation and amortization was $2.7 million and the 2002 Post-Acquisition Period depreciation and amortization was $5.1 million. The significant increase in depreciation and amortization in 2003 and the 2002 Post-Acquisition Period was due to the write-up of the ITBs acquired from Hess and, with respect to 2003, the capitalization of the drydocking cost of the Chemical Pioneer, which we began amortizing over 30 months in November 2003. The total purchase price for the six ITBs, including transaction fees, was $191.5 million. At the time of the acquisition, the gross book value of the five ITBs owned by Hess was $50.0 million. Hess was leasing the sixth ITB, which it purchased in connection with its sale of the six ITBs to us.

        Interest Expense.    Interest expense was $10.0 million in 2003 and $3.0 million for the 2002 Post-Acquisition Period. In September 2002, we borrowed $159.0 million to finance the purchase of six ITBs from Hess. Hess did not allocate any interest expense to the Catug Group in the 2002

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Pre-Acquisition Period. In July 2003, we borrowed $15.0 million to finance the drydocking of, payment of a portion of the purchase price of, and working capital for the operation of the Chemical Pioneer.

        Provision for Income Taxes.    Provision for income taxes was $2.9 million for the 2002 Pre-Acquisition Period. All of the companies in the Catug Group of Hess were corporations and were subject to federal income tax. The provision for taxes in the 2002 Post-Acquisition Period represents federal and state income taxes for the one United States Shipping Master LLC subsidiary that was a corporation subject to federal and state income taxes, as well as state income taxes for those states that tax our limited liability company subsidiaries as corporations. As a limited liability company, United States Shipping Master LLC is treated as a partnership for federal income tax purposes.

        Net Income.    Net income was $2.4 million for 2003, a decrease of $2.3 million, or 49%, as compared to total net income of $4.8 million for 2002. The 2002 Pre-Acquisition Period net income was $5.4 million and the 2002 Post-Acquisition Period net loss was $0.7 million. The decrease in 2003 was the result of a $10.2 million increase in depreciation and amortization, a $7.0 million increase in net interest expense and a $2.3 million increase in general and administrative expenses, partially offset by a $16.0 million increase in voyage revenue, a $3.0 million decrease in vessel operating expenses and a $2.9 million decrease in the provision for income taxes.

Liquidity and Capital Resources

Operating Cash Flows

        Net cash provided by operating activities was $27.2 million for the year ended December 31, 2004, compared to $10.6 million for the year ended December 31, 2003. The increase of $16.6 million resulted primarily from increased net voyage revenue, partially offset by increases in vessel operating and general and administrative expenses. Net cash provided by operating activities was $10.7 million for 2002 ($8.9 million for the 2002 Pre-Acquisition Period and $1.8 million for 2002 Post-Acquisition Period). Net cash provided by operating activities was significantly higher than net income in 2004, 2003 and the 2002 Post-Acquisition Period because depreciation and amortization increased significantly following the acquisition of the six ITBs from Hess in September 2002 due to the higher value attributable to the six ITBs on our books compared to the books of the Catug Group, as well as the acquisition and drydocking of the Chemical Pioneer in 2003. In previous years, Hess had written down the value of the ITBs, resulting in reduced depreciation in the 2002 Pre-Acquisition Period. Hess estimated the cost of future drydocking expenses and accrued these expenses evenly over a five-year period. Our policy is to capitalize drydock expenditures as incurred and to amortize these costs over the vessel's drydock cycle.

Investing Cash Flows

        Net cash used in investing activities totaled $34.5 million for the year ended December 31, 2004 and $1.1 million for the year ended December 31, 2003. In May 2003, we purchased the Chemical Pioneer and Stolt Spirit for $5.5 million including transaction fees. In January 2004, we sold the Stolt Spirit, a damaged vessel purchased in May 2003 for a possible reconstruction, as scrap for $2.0 million. We decided to purchase the Charleston for $33.0 million in April 2004 rather than reconstruct the Stolt Spirit. Additionally, we made $7.9 million of progress payments toward the construction of a new ATB scheduled for completion in April 2006. Net cash used in investing activities totaled $179.1 million for 2002 ($18.2 million in the 2002 Pre-Acquisition Period and $160.9 million in the 2002 Post-Acquisition Period). In the 2002 Pre-Acquisition Period, Hess purchased an ITB that it had previously been leasing. In the 2002 Post-Acquisition Period we purchased the six ITBs from Hess for $191.5 million, including transaction costs, and purchased office furniture and computers for $0.1 million. We purchased additional office furniture for $0.4 million prior to moving into our new offices in February 2003. The Chemical Pioneer was drydocked in July 2003 at a capitalized cost of $12.4 million.

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        The amounts received from or paid to Hess pursuant to the Hess support agreement are not recognized as revenue or expense but are deferred for accounting purposes and will be reflected as an adjustment to the purchase price relating to the acquisition of the ITBs from Hess at the end of the Hess support agreement. Pending such adjustment, they are included in cash flows from investing activities as advances from Hess. Payments by Hess to us under the support agreement were $4.0 million, $5.3 million, and $2.1 million for the years ended December 31, 2004 and 2003, and the 2002 Post-Acquisition Period, respectively. For the years ended December 31, 2004 and 2003, and the 2002 Post-Acquisition Period, five, four and two ITBs, respectively, were covered by the support agreement. One ITB is under contract with Hess at a charter rate less than the support rate; this vessel will be covered by the support agreement upon any termination of that contract. If the rate for an ITB exceeds the support rate set forth in the support agreement, we must pay the excess to Hess to reimburse Hess for any payments made to us by Hess under the support agreement and, once Hess has been fully reimbursed for all payments made under the support agreement, we must pay Hess 50% of any remaining excess. Our obligation to reimburse Hess for these payments terminates upon expiration of the support agreement in September 2007.

Financing Cash Flows

        Net cash provided by financing activities was $29.1 million for the year ended December 31, 2004 and net cash used in financing activities was $4.2 million for the year ended December 31, 2003. In April 2004, we obtained $202.5 million of new financing from our amended and restated credit facility and used it to finance the $33.0 million purchase of the Charleston, refinance $108.2 million of term loans, repay $29.0 million of subordinated debt, distribute $15.0 million to the members of United States Shipping Master LLC, pay $6.6 million of transaction costs, pay $0.4 million bonus to our management and provide $10.1 million of working capital. In November 2004, we used the gross proceeds from our initial public offering to pay down term debt of $93.8 million, pay financing costs, underwriting fees, professional fees and other offering expenses, and to redeem the 899,968 common units received by United States Shipping Master LLC in connection with the transfer of net assets to us. In addition, for the year ended December 31, 2004, we repaid $16.3 million of debt in accordance with scheduled debt amortization. Upon completion of the initial public offering, $23.0 million of cash was retained by United States Shipping Master LLC and not contributed to the Partnership.

        In 2003, we received additional member contributions of $5.9 million to purchase the Chemical Pioneer and Stolt Spirit, incurred additional debt of $15.0 million to finance the drydocking of the Chemical Pioneer and repaid $24.4 million of debt. In 2002, we borrowed $130.0 million under a credit facility with a syndicate of banks, issued a $29.0 million subordinated note to Hess and received $40.9 million of members' equity contributions to purchase the six ITBs from Hess. We made scheduled debt payments of $5.3 million in the 2002 Post-Acquisition Period on the term loans. The financing activities of the Catug Group in 2002 Pre-Acquisition Period represent the consolidation of cash by Hess through the use of zero balance accounts. This resulted in increases or decreases in Hess' investment in the Catug Group.

Oil Pollution Act of 1990

        Tank vessels are subject to the requirements of OPA 90, which mandates that all non-double-hulled tank vessels operating in U.S. waters be removed from petroleum and petroleum-based product transportation services at various times by January 1, 2015, and provides a schedule for the phase-out of the non-double-hulled vessels based on their age and size. Under OPA 90, the phase-out dates for our vessels are as follows: Groton and Jacksonville (2012), Baltimore, Charleston, Chemical Pioneer and New York (2013) and Mobile and Philadelphia (2014). As a result of these requirements, these vessels will be prohibited from transporting crude oil and petroleum-based products in U.S. waters after these dates unless they are retrofitted to comply with OPA 90.

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        In order to bring our ITBs into compliance with OPA 90, at a minimum we will be required to retrofit each ITB with double-sides. We estimate that the current cost to retrofit each ITB with double-sides will be approximately $25 million per vessel. We may elect to construct new forebodies on some or all of our ITBs instead of retrofitting them with double sides. We estimate that the cost of constructing new forebodies will be approximately $55 million per vessel. At the time we make these expenditures, the actual cost could be higher due to inflation and other factors. The cost of retrofitting the ITBs compared to the cost of new forebodies, market conditions, charter rates and the availability and cost of financing will be major factors in determining the OPA 90 compliance plan that we ultimately implement. Depending on the cost of the plan that we ultimately adopt to comply with OPA 90 phase-out requirements, the board of directors of our general partner, with approval by the conflicts committee, may elect to increase our estimated maintenance capital expenditures, which would reduce our basic surplus and our cash available for distribution. In addition, if charter rates decline, it may not be economical for us to retrofit one or more ITBs, in which event we would have to take them out of service, which would also reduce cash available for distribution.

        We do not expect to incur significant capital expenditures in order to bring our parcel tankers into compliance with OPA 90. Although the Chemical Pioneer is double-hulled, it is not OPA 90 compliant; however, we believe that a minor modification, which must be made by 2013, will bring the Chemical Pioneer into compliance with OPA 90. Although the Charleston is also not OPA 90 compliant, our intent is to seek a waiver allowing us to carry refined petroleum products in the vessel's center tanks and non-petroleum-based products in the other tanks rather than retrofit the vessel. If the waiver is not obtained, or under certain circumstances even if the waiver is obtained, we may not be able to transport a sufficient quantity of products that generate qualifying income, in which event we would be required to place the Charleston in a corporate subsidiary to avoid generating too much non-qualifying income, which could reduce cash available for distribution.

Ongoing Capital Expenditures

        Marine transportation of refined petroleum, petrochemical and commodity chemical products is a capital intensive business, requiring significant investment to maintain an efficient fleet and to stay in regulatory compliance. Both domestic (U.S. Coast Guard) and international (International Maritime Organization) regulatory bodies require that our ITBs be drydocked for major repairs and maintenance every five years and that we conduct a mid-period underwater survey in lieu of drydocking, and that our parcel tankers be drydocked twice every five years. In addition, vessels may have to be drydocked in the event of accidents or other unforeseen damage. Periodically, we also make expenditures to acquire or construct additional tank vessel capacity and/or to upgrade our overall fleet efficiency.

        Two of our six ITBs must be drydocked in 2005, an additional two in 2006 and the remaining two in 2007. We estimate that drydocking these vessels will cost approximately $4.0 million to $6.0 million per vessel. In addition, our parcel tankers are required to be drydocked in both 2006 and 2008. We estimate drydocking of the parcel tankers will cost approximately $3.0 million to $5.0 million per vessel. When drydocked, each of our ITBs will be out of service for approximately 45 to 55 days and each of our parcel tankers will be out of service for approximately 35 to 50 days. At the time we drydock these vessels, the actual cost of drydocking may be higher due to inflation and other factors. In addition, vessels in drydock will not generate any income, which will reduce our revenue and cash available for distribution.

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        The following table summarizes total maintenance capital expenditures, consisting of drydocking expenditures, and expansion capital expenditures for the periods presented (in thousands):