AMERICAN PETROLEUM TANKERS PARENT LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our consolidated financial condition, results of operations and cash flows should be read in conjunction with the unaudited condensed consolidated financial statements, and the notes thereto, and other data contained elsewhere in this Quarterly Report. The following discussion and analysis should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included on Form 10-K for the year ended December 31, 2011 as filed with the SEC. References in Item 2. herein to "APT Holding", "we", "our" and "us" refer to the Company and its subsidiaries unless otherwise stated or indicated by context. The following discussion and analysis includes forward-looking statements that involve certain risks and uncertainties. See "Forward-Looking Statements." We are a U.S. based, provider of Jones Act marine transportation services for refined petroleum products, crude oil and chemicals in the U.S. domestic "coastwise" trade. Our fleet consists of five modern, double-hulled product tankers. Our fleet of five vessels has a total capacity of approximately 245,000 dwt and an average age of less than three years.

Our current customers are BP West Coast Products LLC ("BP"), an affiliate of Chevron Corporation ("Chevron"), Shell Trading (U.S.) Company ("Shell"), and the Military Sealift Command department of the U.S. Navy ("MSC"). Three of our vessels are on time charters that range from up to three years under an evergreen type arrangement (which may be terminated at any time upon 90 days notice) to seven years. Our other two vessels are contracted to MSC for one year with four approximately one-year renewal options. We believe it is likely that MSC will exercise its renewal options, although there can be no assurance that it will do so. In 2012, MSC exercised its second one-year renewal option for both the Evergreen State and Empire State. A new charter on the Sunshine State has been agreed to with Chevron for a term of two years and will commence immediately following the expiration of the current charter with Chevron.

Operationally, we retain all strategic and commercial management of our vessels, while the technical management of the vessels is outsourced to certain affiliates of Crowley Maritime Corporation (collectively, "Crowley" or our "Manager"). Crowley's technical management services include crewing, maintenance and repair, purchasing, insurance and claims administration, and security as well as accounting and reporting services. Founded in 1892, Crowley is one of the oldest maritime transportation companies in the U.S., employing approximately 5,100 employees across 80 office locations. We benefit from Crowley's operational expertise, purchasing power and relationships with vendors, suppliers and major labor organizations which are key to providing skilled and experienced crews.

The Company previously filed an application with the U.S. Department of Transportation Maritime Administration (the "Maritime Administration" or "MarAd") for Federal guarantees for the refinancing of the Company's five tankers under the Title XI Federal Ship Financing Program. As previously disclosed, MarAd denied the application, subject to reconsideration. On November 9, 2012, MarAd informed the Company that, following reconsideration, the application was again denied on various grounds. The Company has incurred costs of $1,422 through September 30, 2012, and approximately $1,500 through November 9, 2012, related to potential refinancing of the Notes under the U.S. Title XI Federal Ship Financing Program. Estimated costs of $1,500 will be expensed in the fourth quarter of 2012.

Definitions It is important to understand the meaning of the following terms in order to understand our discussion of our results of operations: • Deadweight tons or dwt. dwt is the abbreviation for deadweight tons, representing principally the cargo carrying capacity of a vessel.

• Revenue. Revenue includes revenue from time charters. Revenue is impacted by changes in charter and utilization rates. For charters which have a duration in excess of one year and include escalation provisions we recognize revenue on a straight-line basis over the life of the contract.

• Vessel operating expenses. The most significant direct vessel operating expenses are manning costs, vessel maintenance and repairs, and insurance.

We pay the vessel operating expenses.

• Depreciation and amortization. We incur fixed charges related to the depreciation of the historical cost of our fleet. The aggregate number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures. Depreciation and amortization is determined as follows: • Vessels and equipment are recorded at cost, including capitalized interest and transaction fees where appropriate, and depreciated to scrap value using the straight-line method; and • Both domestic and international regulatory bodies require that petroleum carrying vessels be drydocked for major repair and maintenance at least every five years (this requirement increases to twice in a five year period after a vessel's first fifteen years of operation). In addition, vessels may have to be drydocked in the event of accidents or other unforeseen damage. Drydocking costs are deferred and amortized over the estimated period between dry-dockings, although we have not sustained any drydocking costs to date.

15 -------------------------------------------------------------------------------- Table of Contents • General and administrative expenses. General and administrative expenses consist of employment costs for shore side staff and cost of facilities as well as legal, audit and other administrative costs.

• Drydocking days. Drydocking days are days designated for the cleaning, inspection and survey of vessels, and resulting maintenance work, as required by the U.S. Coast Guard and the American Bureau of Shipping.

Drydocking days may also include unscheduled work in the event of an accident or other unforeseen damage.

• Time charter equivalent. Time charter equivalent is equal to the voyage revenue earned by a vessel during a defined period, divided by the total number of actual days worked by that vessel during the period involved, net of fuel and port expenses.

Critical Accounting Policies We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of the condensed consolidated financial statements, upon which this discussion and analysis is based, requires management to make estimates and judgments which impact those condensed consolidated financial statements. The most critical of these estimates and accounting policies relate to long-lived asset depreciation, revenue recognition, and valuation of derivative instruments. Different assumptions in the application of these policies could result in material changes in our consolidated financial condition, results of operations, or cash flows. For a more complete discussion of these and other accounting policies, see the Notes to the Consolidated Financial Statements for the year ended December 31, 2011.

Vessels and Equipment Vessels and equipment are stated at cost. Normal repair and maintenance expenditures are expensed as incurred. Depreciation is computed using the straight-line method over the vessels' estimated useful lives of 30 years based on the vessels' cost less their estimated salvage value. Interest is capitalized in conjunction with our construction of vessels.

We assess recoverability of the carrying value of a long-lived asset when indicators of impairment are present by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and its fair value.

Revenue Recognition Revenues from long-term time charters of vessels with annual escalation clauses are recognized on a straight-line basis over the term of the contract. We also assess renewal options on time charters for bargain renewal options, and account for any bargain renewal options as a constructive extension of the lease term.

Revenue is impacted by changes in charter rates and the number of on hire days.

Derivative Instruments Our use of derivative instruments, principally an interest rate cap, is limited to non-trading purposes and is designed to manage exposure to interest rate risks. The fair value of our interest rate cap represents the amount that would be paid to us by the counterparty to terminate the cap at the reporting date and is estimated based on a discounted cash flow model using a quoted interest rate.

Changes in the fair market value of the interest rate cap could result in significant fluctuations in earnings.

Results of Operations The following table presents our operating results for the three and nine months ended September 30, 2012 and 2011.

16 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenues $ 24,353 $ 27,616 $ 71,524 $ 82,042 Expenses: Vessel operating expenses 8,737 8,838 26,402 25,957 General and administrative expenses 462 504 1,661 1,403 Depreciation and amortization 5,947 5,947 17,840 17,803 Management fees 693 709 2,061 2,283 Total Expenses 15,839 15,998 47,964 47,446 Operating income 8,514 11,618 23,560 34,596 Other income (expense): Interest income 1 1 1 7 Interest expense (20,613 ) (19,206 ) (59,631 ) (56,503 ) Debt extinguishment expense - - - (2,220 ) Derivative losses (24 ) (282 ) (212 ) (720 ) Net loss $ (12,122 ) $ (7,869 ) $ (36,282 ) $ (24,840 ) Three Months Ended September 30, 2012 versus Three Months Ended September 30, 2011 Revenues In the third quarter of 2012, vessel revenues were $24.4 million compared to $27.6 million in 2011. This was due to reductions in the charter rates in the first option year for the MSC vessels Empire State and Evergreen State. In the third quarters of 2012 and 2011, overall utilization was 100% based on 460 operating days and 460 ownership days.

Vessel Operating Expenses In the third quarter of 2012, vessel operating expenses were $8.7 million compared to $8.8 million in the third quarter of 2011. Vessel operating expenses decreased in 2012 primarily due to lower stores, spares, and other costs.

General and Administrative Expenses General and administrative expenses in the third quarter of 2012 were $0.5 million compared to $0.5 million in the third quarter of 2011.

Depreciation and amortization Depreciation and amortization was $5.9 million in the third quarter of 2012 and 2011.

Management Fees Management fees were $0.7 million in the third quarter of 2012 and 2011. Annual increases in management fees were offset by a transition of non-vessel administration from Crowley to our staff in July 2011.

Interest Expense Interest expense increased to $20.6 million during the third quarter of 2012 compared to $19.2 million in 2011. The increase was primarily the result of a higher weighted-average outstanding balance of our Sponsor Facility due to the capitalization of paid-in-kind interest.

Derivative Losses Derivative losses were $0.02 million during the third quarter of 2012 and compared to $0.3 million 2011. Derivative losses decreased in the third quarter of 2012 due to a smaller decline in the fair value of our interest rate cap.

17 -------------------------------------------------------------------------------- Table of Contents Net Loss As a result of the foregoing factors, net loss was $12.1 million in 2012, compared to a net loss of $7.9 million for 2011.

Nine Months Ended September 30, 2012 versus Nine Months Ended September 30, 2011 Revenues In 2012, vessel revenues were $71.5 million compared to $82.0 million in 2011.

This is due to reductions in the charter rates in the first option year for the MSC vessels Empire State and Evergreen State, as well as fewer operating days.

In 2012, overall utilization was 98% based on 1,349 operating days and 1,370 ownership days while 2011 utilization was 100% based on 1,365 operating days and 1,365 ownership days.

Vessel Operating Expenses In 2012, vessel operating expenses were $26.4 million compared to $26.0 million in 2011. Vessel operating expenses increased in 2012 primarily due to higher crew, repairs and spares expense.

General and Administrative Expenses General and administrative expenses in 2012 were $1.7 million compared to $1.4 million in 2011. General and administrative expenses increased in 2012 due to higher professional fees and other costs.

Depreciation and amortization Depreciation and amortization was $17.8 million in 2012 and 2011. Depreciation and amortization increased nominally in 2012 due to increased amortization of software costs in 2012.

Management Fees Management fees decreased to $2.1 million in 2012 from $2.3 million in 2011.

Annual increases in management fees were offset by a transition of non-vessel administration from Crowley to our staff in July 2011.

Interest Expense Interest expense increased to $59.6 million during 2012 compared to $56.5 million in 2011. The increase was primarily the result of a higher weighted-average outstanding balance of our Sponsor Facility due to the capitalization of paid-in-kind interest. This was partially offset by a lower outstanding balance on the Notes due to the prepayment of $27.0 million in May 2011.

Debt Extinguishment Expense Debt extinguishment expense was $2.2 million in 2011 due to the prepayment of $27.0 million of the Notes in May 2011. No debt was prepaid in 2012.

Derivative Losses Derivative losses were $0.2 million in 2012 compared to $0.7 million in 2011.

Derivative losses decreased in 2012 due to a smaller decline in the fair value of our interest rate cap.

Net Loss As a result of the foregoing factors, net loss was $36.3 million in 2012, compared to a net loss of $24.8 million for 2011.

Liquidity and Capital Resources We operate in a capital intensive industry. Our primary liquidity requirements relate to operating expenses, semi-annual payments for interest under the Notes, capital expenditures for the maintenance of vessels, and payments under our management service agreements. Our long-term liquidity needs primarily relate to interest and principal debt payments under the Notes and Sponsor Facility, which mature in 2015 and 2016, respectively. Long-term liquidity needs will depend upon the timing and amount of drydocking expenditures, repairs and maintenance activity, vessel additions and dispositions and fluctuations in working capital balances and scheduled maintenance.

Our time charter contracts are structured such that we are paid in advance of providing the service, typically at the start of each month with the exception of MSC who pays charter hire every 15 days in arrears. As a result, we receive cash prior to recognizing revenue or expense, thus minimizing working capital requirements.

18 -------------------------------------------------------------------------------- Table of Contents We believe that cash flows from operations will be sufficient to meet our existing liquidity needs for the next 12 months. We were in compliance with all of the covenants contained in our debt agreements as of September 30, 2012.

Working Capital Working capital at September 30, 2012 was $51.7 million compared with $31.1 million at December 31, 2011. This increase was primarily due to the increase in cash, and partially offset by the decrease in prepaid expenses and other current assets and the increase in accrued interest.

Cash Flows For the Nine Months Ended September 30, 2012 2011 (dollars in thousands) Net cash flow provided by operating activities $ 28,494 $ 38,833 Net cash flow provided by investing activities - 6,665 Net cash flow used in financing activities (548 ) (28,755 ) Operating cash flows-Net cash flow provided by operating activities was $28.5 million for the nine months ended September 30, 2012 and $38.8 million for the nine months ended September 30, 2011. The decrease was primarily due to lower charter revenues.

Investing cash flows-Net cash provided by investing activities was $6.7 million for the nine months ended September 30, 2011 comprised of $7.9 million withdrawal of restricted cash, partially offset by $1.3 million in capital expenditures. There were no investing activities in 2012.

Financing cash flows-Net cash used in financing activities was $0.5 million for the nine months ended September 30, 2012 and $28.8 million for the nine months ended September 30, 2011. The Company repaid $27.0 million of the Notes in April 2011.

Long-Term Debt Long-term debt consists of the following: September 30, December 31, 2012 2011 Notes, net of $3,764 and $4,857 unamortized original discount at September 30, 2012 and December 31, 2011, respectively $ 254,236 $ 253,143 Sponsor Facility 442,595 405,998 $ 696,831 $ 659,141 In 2006, we entered into the Sponsor Facility, pursuant to which the Class A Members of APT or their affiliates agreed to make available $325.0 million of revolving credit loans. Beginning July 2009, the monthly interest payments are treated as paid-in-kind in lieu of monthly cash payments. As a result, the Company is allowed to exceed its total commitment under the Sponsor Facility for the capitalized paid-in-kind payments. Under the terms of the Sponsor Facility, the ability to borrow additional amounts against this facility ceased in June 2011. In addition, the security agent is due a fee of 0.005% of borrowings outstanding and the administrative agent is due a fee of $0.3 million per year.

Concurrent with the issuance of the Notes, we further amended the Sponsor Facility to effect an interest rate conversion from a variable rate of LIBOR + 4.5% to a fixed rate of 12% payable in kind, the extension of the maturity of the Sponsor Facility to 2016 and a subordination of our first lien security interest on the Sunshine State, Evergreen State, and Empire State to a second lien, resulting in a second lien security interest on all five of our vessels.

The Sponsor Facility is subject to an intercreditor agreement with the holders of the Notes. During the three months ended September 30, 2012 and 2011, the Company recorded $12.9 million and $11.5 million, respectively, for interest-in-kind payments that were capitalized in the Sponsor Facility balance.

During the nine months ended September 30, 2012 and 2011, the Company recorded $36.6 million and $32.5 million, respectively, for interest-in-kind payments that were capitalized in the Sponsor Facility balance. An interest-in-kind accrual of $20.8 million and $30.1 million was recorded as long-term debt at September 30, 2012 and December 31, 2011, respectively.

Under the terms of the indenture governing the Notes, the Company may redeem up to 10% of the original issue amount in the twelve month period prior to May 1, 2011 at 103%, and up to an additional 10% of the original issue amount in the twelve month period prior to May 1, 2012 at 103%. On April 28, 2011, the Company completed the redemption of $27.0 million of the principal amount of the Notes.

No other redemptions were completed prior to May 1, 2012.

19 -------------------------------------------------------------------------------- Table of Contents The maturities of long-term debt as of September 30, 2012, excluding interest accreted on the Sponsor Facility subsequent to September 30, 2012, are as follows: 2015 $ 258,000 2016 442,595 $ 700,595 Capital Expenditures.

During the nine months ended September 30, 2012, there were no capital expenditures. We estimate that our liability to NASSCO is $1.9 million as of September 30, 2012, payable in 2012 for completion of our last vessel delivered in December 2010.

Off-balance sheet arrangements We do not have any off-balance sheet arrangements.

Contractual Commitments The following table reflects our contractual commitments associated with our debt and other obligations as of September 30, 2012.

Payments Due by Period < 1 year 1 - 3 years 3 - 5 years Total Long-term debt (1) $ 26,445 $ 310,890 $ 667,847 $ 1,005,182 Contractual commitments (2) 1,900 - - 1,900 $ 28,345 $ 310,890 $ 667,847 $ 1,007,082 (1) The long-term debt consists of principal values of $258,000 Notes and $442,595 Sponsor Facility, which bear interest at 10.25% per annum and 12% calculated over a 360-day year, respectively. Amounts include contractual interest payments and paid-in-kind interest.

(2) Contractual commitments are related to remaining spending under the NASSCO vessel construction contract. Contractual commitments do not include amounts to our Manager as we may cancel the contract at any time and without cause upon 90 days notice.

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