NOTE 7 — VESSELS, DEFERRED DRYDOCK AND OTHER PROPERTY:

Vessels and other property consist of the following:

As of December 31,	2012		2011
Vessels, at cost	$	3,665,005	$	3,776,344
Accumulated depreciation		(948,448)		(818,555)
Vessels, net		2,716,557		2,957,789

Construction in progress		95,283		239,768

Other property, at cost		71,306		68,999
Accumulated depreciation and amortization		(45,858)		(39,633)
Other property, net		25,448		29,366

Total Vessels and other property	$	2,837,288	$	3,226,923

A breakdown of the carrying values of the Company’s vessels, excluding construction in progress, by reportable segment and fleet as of December 31, 2012 and 2011 follows:

As of December 31, 2012
					Net			Average		Number of
			Accumulated		Carrying			Vessel Age		Owned
	Cost		Depreciation		Value			(by dwt)		Vessels

International Flag Crude Tankers
VLCCs (includes ULCC)	$	983,018	$	(271,191)	$	711,827	⁽¹⁾		9.5		11
Suezmaxes		734		(450)		284	⁽²⁾		N/A		-
Aframaxes (includes OSG Lightering fleet)		367,859		(157,233)		210,626	⁽³⁾		11.0		8
Panamaxes		467,984		(149,874)		318,110			10.1		9
Total International Flag Crude Tankers		1,819,595		(578,748)		1,240,847			9.8		28

International Flag Product Carriers
Panamax		249,028		(33,078)		215,950			4.1		4
Handysize		449,041		(164,381)		284,660			7.8		14
Total International Flag Product Carriers		698,069		(197,459)		500,610	⁽⁴⁾		6.6		18

Total U.S. Flag Vessels		1,147,341		(172,241)		975,100			5.4		14

Fleet Total	$	3,665,005	$	(948,448)	$	2,716,557			9.0		60

⁽¹⁾Includes five VLCCs that are pledged as collateral under secured term loans due through 2023, as discussed in Note 11, “Debt,” with an aggregate net carrying value of $486,103.

⁽²⁾Represents capital expenditures made by the Company on bareboat chartered-in vessels.

⁽³⁾Includes three Aframaxes that are pledged as collateral under secured term loans due through 2023, as discussed in Note 11, “Debt,” with an aggregate net carrying value of $133,433.

⁽⁴⁾Includes five Handysize Product Carriers and two Panamax Product Carriers that are pledged as collateral under secured term loans due through 2020, as discussed in Note 11, “Debt,” with an aggregate net carrying value of $284,802.

As of December 31, 2011
					Net		Average		Number of
			Accumulated		Carrying		Vessel Age		Owned
	Cost		Depreciation		Value		(by dwt)		Vessels

International Flag Crude Tankers
VLCCs (includes ULCC)	$	903,878	$	(234,542)	$	669,336		9.2		10
Suezmaxes		1,494		(605)		889		N/A		-
Aframaxes (includes OSG Lightering fleet)		399,955		(142,683)		257,272		10.0		8
Panamaxes		464,784		(131,225)		333,559		9.1		9
Total International Flag Crude Tankers		1,770,111		(509,055)		1,261,056		9.4		27

International Flag Product Carriers
Panamax		248,349		(23,718)		224,631		3.1		4
Handysize		686,916		(145,904)		541,012		6.5		15
Total International Flag Product Carriers		935,265		(169,622)		765,643		5.5		19

Total Other International Flag Vessels		28,682		(23,998)		4,684		24.3		1

Total U.S. Flag Vessels		1,042,286		(115,880)		926,406		5.1		12

Fleet Total	$	3,776,344	$	(818,555)	$	2,957,789		8.5		59

Vessel activity, excluding construction in progress, for the three years ended December 31, 2012 is summarized as follows:

			Accumulated		Net Book
	Vessel Cost		Depreciation		Value
Balance at December 31, 2009	$	2,671,292	$	(624,299)	$	2,046,993
Purchases and vessel additions		52,026
Transfers from construction in progress		412,290
Disposals and transfers to held for sale		(52,792)		41,398
Depreciation				(124,894)
Impairment		(16,053)

Balance at December 31, 2010		3,066,763		(707,795)		2,358,968
Purchases and vessel additions		38,203
Transfers from construction in progress		710,793
Disposals		(39,415)		29,263
Depreciation				(140,023)
Impairment		-

Balance at December 31, 2011		3,776,344		(818,555)		2,957,789
Purchases and vessel additions		7,983
Transfers from construction in progress		189,105
Disposals		(29,653)		25,104
Depreciation				(154,997)
Impairment		(278,774)

Balance at December 31, 2012	$	3,665,005	$	(948,448)	$	2,716,557

The total of purchases and vessel additions and transfers from construction in progress will differ from expenditures for vessels as shown in the consolidated statements of cash flows because of expenditures for vessels remaining under construction at the beginning and end of each respective period.

Purchase and Construction Commitments

As of December 31, 2012, the Company had remaining commitments for vessels to be wholly owned by the Company of $41,724 on non-cancelable contracts for the construction of two Aframaxes. In October 2012, the Company executed an amendment to the construction contract for the second of its two Aframaxes, which among other things, resulted in the conversion of the vessel into an LR2, which is a coated Aframax, as well as the postponement of the vessel’s delivery from the third quarter of 2013 to the first quarter of 2014. On December 27, 2012, the Bankruptcy Court granted the Company’s motion to assume the obligations under the first contract, and on March 21, 2013, the Bankruptcy Court granted the Company’s motion to assume the obligations under the second contract.

Vessel Impairments

During the quarters ended March 31, 2010 and June 30, 2010, the Company recorded impairment charges totaling $3,607 and $25,176 (including $12,730 relating to vessel related intangible assets), respectively, to write down a total of eight vessels to their estimated fair values. These write-downs covered (i) two single-hulled International Flag Aframaxes engaged in lightering in the U.S. Gulf, (ii) four single-hulled U.S. Flag vessels, (iii) an older double-hulled U.S. Flag tanker with an inefficient gas turbine engine and (iv) a 1981-built U.S. Flag lightering ATB. The write-downs were the result of difficulties experienced in employing single-hulled vessels and changes in requirements for the Delaware Bay lightering business. All of these vessels were delivered to buyers between July 2010 and October 2011.

International Fleet

The Company gave consideration to events or changes in circumstances that could indicate that the carrying amounts of the vessels in the Company’s International Flag fleet may not be recoverable as of December 31, 2012, including factors such as the impact of the Chapter 11 Cases discussed in Note 3, “Bankruptcy Filing and Going Concern” above, as well as the fact that average spot rates achieved in the Company’s International Flag segments continued to face downward pressure since the industry’s cyclical downturn that began in the fourth quarter of 2008. These factors combined with the likelihood that the current markets may continue in the near term and put continued pressure on second hand tanker values, which have experienced significant declines in the past twenty-four months, were indicators warranting impairment tests of the Company’s International Flag fleet as of December 31, 2012. Accordingly, the Company performed impairment tests on all of its owned operating and newbuild International Crude and Products vessels as of December 31, 2012. The forecasted rates used in the impairment test performed at December 31, 2012 were lower than those used during the prior quarters of 2012 as there is increasing evidence (as noted in recently reduced forecasts published by analysts) that the recovery in the Crude and Products markets will be both delayed and not as pronounced (delaying recovery to historical averages). The Company also took into consideration the Company’s long-term intentions relative to certain of its older or non-core vessels, including management’s assessment of whether the Company would drydock and continue to trade them given the current and expected weak rate environment. In developing estimates of future cash flows, the Company made assumptions about future performance, with significant assumptions being related to charter rates, ship operating expenses, utilization, drydocking requirements, residual value and the estimated remaining useful lives of the vessels. These assumptions are based on historical trends as well as future expectations. Specifically, in estimating future charter rates, management took into consideration rates currently in effect for existing time charters and estimated daily time charter equivalent rates for each vessel class for the unfixed days over the estimated remaining lives of each of the vessels. The estimated daily time charter equivalent rates used for unfixed days were based on a combination of (i) internally forecasted rates that are consistent with forecasts provided to the Company’s senior management and Board of Directors, and (ii) the trailing 10-year historical average rates, based on quarterly average rates published by a third party maritime research service. The internally forecasted rates are based on management’s evaluation of current economic data and trends in the shipping and oil and gas industries. In estimating the fair value of the vessels for the purposes of step 2 of the impairment tests, the Company utilized a market approach by using third party appraisals. Based on the tests performed, impairment charges totaling $278,345, including $608 recorded as a reduction in deferred drydock costs, were recorded on one ULCC, two VLCCs, two International Flag Aframaxes engaged in lightering in the U.S. Gulf and ten Handysize Product Carriers (including $94,288 applicable to five Handysize Product Carriers that are pledged as collateral under the Company’s term loans maturing in 2020) to write-down their carrying values to their estimated fair values at December 31, 2012.

U.S. Flag fleet

The Company also considered the need to test its U.S. Flag fleet for impairment as of December 31, 2012, but did not identify events or changes in circumstances that warranted impairment testing. Factors considered included the resolution of uncertainties concerning two ATB assets employed in the Delaware Bay Lightering business (as further described below), the overall turnaround in the Company’s U.S. Flag business over the past two years and the lack of similar downward rate pressure as that seen in the international markets. Specifically, in 2012, spot rates increased due to increasing demand for Jones Act tankers and barges resulting from the emerging trade in U.S. Shale Oil. As a result, the Company’s U.S. Flag fleet ATB’s are increasingly able to secure term charter business at rates that are sufficient to recover their carrying values.

In September 2011, Sunoco, a core customer of the Company’s Delaware Bay lightering business, announced that it would make its Marcus Hook and Philadelphia refineries available for sale. Subsequently, in December 2011, Sunoco announced that it expected to begin idling the Marcus Hook facility immediately while it continued to seek a buyer and also pursue options with third parties for alternate uses of the facility. Sunoco also announced that it intended to continue to operate the Philadelphia refinery as long as market conditions warrant. However, if a suitable transaction could not be implemented, Sunoco would permanently idle the main processing units at the Philadelphia refinery no later than August 2012. The closures, if they were to occur, could have resulted in the Company’s redeployment of the two new ATBs used in the Delaware Bay Lightering business to other locations with possible reductions in revenues earned. These two ATBs, the OSG 350 and the OSG 351, are recent newbuilds with relatively high cost bases and redeploying one or both of these vessels into the clean products trade would require modifications to be made to the vessels. Based on the tests performed it was determined that the estimated undiscounted future cash flows were expected to exceed the carrying values of each of the vessels as of December 31, 2011.

On July 2, 2012, Sunoco, announced it had entered into a joint venture agreement with a third party to take over the operations of its Philadelphia refinery. On September 1, 2012, the Company entered into a termination, settlement and replacement agreement with Sunoco, which, among other things, provided for a 50% reduction of the required minimum barrel volumes under the long-term lightering contract (see Note 17, “Leases”). The new lightering contract with Sunoco will result in both the OSG 350 and the OSG 351 continuing to be employed in the Delaware Bay lightering trade at rates that should provide for the full recovery of the cost bases of these units.

In December 2012, the Company recognized an impairment charge of $1,037 to write-down the carrying value of a spare tug boat that had been idle since mid-2011 to its estimated sales price less costs to dispose. This tug boat was subsequently delivered to buyers in April 2013.

Shipyard Contract Termination

In early 2009, OSG began negotiations with Bender Shipbuilding & Repair Co., Inc. (“Bender”) to terminate the construction agreements covering the six ATBs and two tug boats due to the following: (1) repeated delays in vessel delivery dates from the original contract delivery dates, (2) Bender’s request for substantial price increases on all contracted vessels and (3) OSG’s concern about Bender’s ability to complete the ATBs and tug boats within contract terms, including Bender’s lack of performance under such agreements and its financial condition.

On March 13, 2009, the Company entered into a termination agreement with Bender. Under the terms of the agreement, Bender agreed to transfer ownership of the unfinished vessels (and all related components and equipment) to OSG in their current state of completion in consideration for which OSG would, among other things (1) pay and/or reimburse Bender for the costs associated with positioning the units for transportation to the alternative shipyards and certain other material and labor costs related to construction of the units, (2) assume certain specified obligations related to construction of the units and (3) render a payment of $14,000 to a third party for the release of priority liens on the vessels being transferred to the Company. Through December 31, 2010, the amounts referred to in (1), (2) and (3) above aggregated $48,737 of which $24,484 was charged to expense from the date of the termination agreement, with the balance being capitalized as construction in progress. The Company completed construction at alternative shipyards of the two ATBs, which were delivered in March 2010 and April 2011, and the two tug boats, which were delivered in June and September 2011.

Unsecured creditors filed an involuntary petition for bankruptcy against Bender in June 2009 that was subsequently converted to a voluntary petition. In December 2010, a settlement agreement was reached by the creditors of Bender, leading to the approval by the bankruptcy court of a liquidation plan that should result in OSG making further recoveries against the $14,000 described above, which was documented as a secured loan. During 2012 and 2011, approximately $588 and $3,400 were recovered from property sales in accordance with the liquidation plan. Such recoveries are included in (gain)/loss on disposal of vessels in the consolidated statements of operations.

Vessel Acquisitions and Deliveries

During 2012, the Company completed construction of a VLCC and an International Flag Handysize Product Carrier.

During 2011, the Company completed construction of a U.S. Flag ATB, two International Flag Panamax Product Carriers, one VLCC, an International Flag Handysize Product Carrier and two tug boats.

During 2010, the Company completed construction of one VLCC, two International Flag Handysize Product Carriers and one ATB. In addition, OSG purchased one U.S. Flag Product Carrier upon its delivery from a shipyard. During the third quarter of 2010, another International Flag Handysize Product Carrier commenced a bareboat charter-in with a term of approximately five years upon its delivery from a shipyard. OSG entered into negotiations to purchase this vessel and in late-October 2010, completed the purchase of the vessel and the bareboat charter-in was canceled.

Vessel Sales

In the fourth quarter of 2012, the Company delivered its Car Carrier, the Overseas Joyce, to buyers and recognized a gain of approximately $8,078 on this sale.

During 2011, the Company delivered its two remaining single-hulled U.S. Flag Tankers (one of which was classified as held for sale on the December 31, 2010 consolidated balance sheet) and the remaining chartered-in single-hulled International Flag Aframax in which it had a residual interest to buyers. The Company recognized a gain of $2,117 on these transactions. Also, in October 2011, the Company delivered the 1981-built U.S. Flag lightering ATB discussed above, to buyers, recognizing a gain of $1,464. The gain on disposal of vessels during 2011 also includes approximately $3,400 in proceeds received in connection with property sales in accordance with the Bender bankruptcy liquidation plan, as discussed above, and a loss of approximately $4,583 related to the cancellation of an order with an equipment supplier and the retirement of vessel support equipment.

In November 2010, the Company delivered one of its single-hulled U.S. Flag Tankers to buyers. Also, in December 2010, one of the chartered-in single-hulled International Flag Aframaxes in which the Company had a residual interest and for which an impairment charge was recorded in the second quarter of 2010, was delivered to buyers. The Company recognized a gain of $1,162 on these transactions.

During the third quarter of 2010, the Company delivered two U.S. Flag Tankers (one single-hulled and one double-hulled) to buyers. The Company recognized a net gain of $679 on the sale of these vessels. In addition, the Company determined that an order placed with a CNG equipment supplier would not be completed. Accordingly, the Company recognized a loss of approximately $2,300 related to a deposit advanced to the supplier.

Drydocking activity for the three years ended December 31, 2012 is summarized as follows:

For the year ended December 31,	2012		2011		2010
Balance at January 1	$	66,023	$	46,827	$	58,535
Payments for drydocking		45,990		47,360		20,015
Sub-total		112,013		94,187		78,550
Drydock amortization		(34,382)		(27,680)		(30,530)
Amounts recognized upon sale/redelivery of vessels and non-cash adjustments		(2,605)		(484)		(1,193)
Impairments		(608)
Balance at December 31	$	74,418	$	66,023	$	46,827