Capital Clean Energy Carriers Corp (CCEC) 2009 Q2 法說會逐字稿

Welcome to the second-quarter earnings release conference call for Capital Product Partners. As you know earlier today the Partnership reported its financial results for the second quarter of 2009 and our press release has been posted to the Capital Product Partners website at www.capitalpplp.com. There are also slides supporting today's audio presentation available on the website. If you do not have access to the Internet or would like a copy of the release faxed or emailed to you, please contact Jerry Kalogiratos at +30-210-458-4950.

I would remind everybody that the conference today will include some forward-looking statements that are subject to certain risks and uncertainties which are detailed in our 2008 Form 20-F filing as well as other filings which have been made with the SEC. These and other forward-looking statements are based on management's current plans, expectations, estimates, assumptions, and beliefs concerning future events impacting the partnership.

The partnership cautions that forward-looking statements are not guarantees and the actual results could differ materially from those expressed or implied in the forward-looking statements. Please also refer to our forward-looking statements included on the accompanying slides.

In addition, non-GAAP financial measures as defined by the SEC may be discussed on this call. To comply with SEC rules, reconciliations of non-GAAP financial measures have been attached to this morning's release.

I will now turn the call over to the primary speaker on today's call, Ioannis Lazaridis, Chief Executive Officer and the Chief Financial Officer of Capital Product Partners. Please go ahead.

Thank you, Jessica, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation.

Starting with slide 1, Capital Product Partners achieved overall solid financial results in the second quarter 2009 against a backdrop of a very challenging spot market for both products and crew tankers. The stability of our revenues is the result of our [challenging] strategy and the excellent operational performance of our vessels, which is evidenced by the absence of any material off-hire for yet another quarter. I'm going to make some comparisons on today's call between the second quarter of 2009 and the second quarter of 2008 as due to the seasonality of our business, this is the most meaningful period to compare to.

Net income for the quarter was $8 million compared to $12.9 million in the second quarter of last year. Earnings per limited partnership unit were $0.32 in the second quarter this year, which is $0.19 less than the $0.51 achieved in the second quarter of last year primarily due to the absence of profit share revenues and higher interest costs. Our operating surplus amounted to $11.5 million for the quarter.

On July 27, 2009, our Board declared a cash distribution for the quarter of $0.41, thus maintaining the same distribution level during the second quarter of 2008 with the exception of the exceptional nonrecurring distribution of $1.05 per unit paid for the fourth quarter of 2008. It is important to note that our annualized yield is currently approximately 15%. I would like to remind you that we have paid a total of $4.23 in distributions to our unitholders since our IPO in April 2007.

Due to the significant deterioration in the tanker market, the partnership decided to obtain an amendment to certain terms in its loan agreements valued until the end of June 2012. The lenders in both affinities have agreed to increase the fleet loan-to-value covenant to 80% from 72.5%. It was also agreed to amend the manner in which market valuations of our vessels are conducted.

Vessels chartered to certain of our top-rated oil majors will be valued with the charters attached rather than charter-free. In exchange, the interest margin for both of our credit facilities will increase to 135 to 145 basis points over LIBOR subject to the level of the fleet to loan to value covenant in each period.

Currently the margin of our $370 million credit facility is 75 basis points over LIBOR and for now, our $350 million credit facility, it is 110 basis points over LIBOR. All other terms in both of our facilities remain unchanged. We estimate the additional interest expense as a result of the margin increase to amount to up to $3 million per annum.

Turning to slide 2, total revenues for the quarter were approximately $31.2 million, down from $32 million in the second quarter last year. And declining revenues is primarily due to the absence of profit sharing revenues from this quarter. Total vessels operating expenses and SG&A costs for the period were at $8.7 million compared with $7.5 million a year ago. This increase was mainly due to the impact of certain additional fees incurred under the technical management agreement with our sponsor.

Interest expense and finance costs were $7.5 million, up from $5.9 million in the same period last year. The increase in interest expense is due to the increased debt of the partnership compared to a year ago and due to the increased funding costs to the banks in current -- in accordance with occurrence of our existing warrant agreements that amounted to $0.4 million in the second quarter.

As funding costs continue to [exit] LIBOR for the banks in our credit facilities, the funding costs over LIBOR for the third quarter are expected at similar levels as in the second quarter. Net income for the second quarter was $8 million compared to $12.9 million in the same period last year.

Moving onto slide 3, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non-GAAP financial measure that is defined fully in our press release.

Adding certain non-cash items back to net income, we generated approximately $15.3 million in cash from operations during the second quarter 2009. After setting aside $3.8 million in replacement capital expenditures and a haul back of $1.1 million, we will pay $10.4 million to our unitholders for this quarter or $0.41 per unit, which is equal to the distribution for the first quarter 2009. Our unit covenants for this quarter stands at 1.1 times. The second-quarter distribution will be paid on August 14 to our unitholders of record on August 6.

On slide 4, you can see details of our balance sheet. I would like to remind you that we have zero purchased in new building commitments and both our debt facilities are non-amortizing until June 2012 and March 2013 respectively. Of the total $720 million available under our (inaudible) facilities, we will still have $246 million in remaining undrawn amounts.

On slide 4, you can see details of our -- sorry -- turning to slide 5, we will discuss the spot and crude markets for the second quarter. According to Clarkson's data, the second quarter of 2009 was the worst quarter over the last 15 years in terms of both, in terms of clean product tanker earnings while the year-to-date averages point to the most depressed clean product market over the last decade. All products demand remains under severe strain in each of the major OECD regions such as North America, Japan, and Europe, with all three areas recording falling demand for the 13th month in a row according to the IEA.

The lack of arbitrage movements and excess vessel supply worked negatively on the MR spot market worldwide with no immediate visible prospects for near-term recovery especially as historically the third quarter is the weakest of the year. The Suezmax market was relatively more resilient throughout the second quarter due to increased demand for West African crude from Chinese, Indian, and US refiners ahead of the summer driving season. However, as the market entered July, more downward pressure on rates emerged as reduced loading schedules for West African and Black Sea exports coincided with more spot tonnage available and as a result, Suezmax spot rates dropped significantly since.

The period market is currently stagnant with very few [pictures] taking place in those at the first level, while the protracted market slump is putting continuous pressure on tanker asset prices. The IEA adjusted the 2009 global oil demand in its June report upwards by 120,000 barrels per day, following stronger-than-expected first quarter '09 OECD economic data. These revisions do not necessarily imply an economic recovery but reflect a slowing down in the previously reported sharp decline.

Global oil demand is projected at 83.3 million barrels per day for 2009, down 2.9% or 2.5 million barrels per day comparable to 2008 while worldwide consumption of crude oil for 2010 is expected to increase by 1.4 million barrels per day or 1.7% to 85.2 million barrels per day on the back of non-OECD demand oil growth.

You can see a description of our fleet on slide 6. After concluding the previously announced vessel swap with our sponsor earlier in the second quarter, the (technical difficulty).

I understand I lost the connection, so if I may start again from slide 5. Turning to slide 5, we will discuss the spot and crude markets for the second quarter. According to Clarkson's data, the second quarter of 2009 was the worst quarter of the last 15 years in terms of clean product tanker earnings while the year-to-date averages point to the most depressed clean product market of the last decade.

Foreign products demand remain under severe strain in each of the major OECD regions such as North America, Japan, and Europe, with all three areas recording falling demand for the 13th month in a row according to the IEA. The lack of arbitrage movement and excess vessel supply weighed negatively on the MR spot market worldwide with no immediate visible prospect for near-term recovery especially as historically the third quarter is the weakest of the year.

The Suezmax market was relatively more resilient throughout the second quarter due to the increased demand for West African crude from Chinese, Indian, and US refiners ahead of the summer driving season. However, as the market entered July, more downward pressure on rates emerged as reduced loading schedules for West African and Black Sea exports coincided with more spot tonnage available and as a result, Suezmax spot rates dropped significantly since.

The period market is currently stagnant with very few pictures taking place and those at depressed levels while the protracted market slump is putting continued pressure on tanker asset prices. The IEA adjusted in 2009 global oil demand in its June report upwards by 120,000 barrels per day, following stronger-than-expected first-quarter '09 OECD data. This resilience do not necessarily imply an economic recovery, but reflect a swing down in the previously reported sharp decline.

Global oil demand is projected at 83.3 million barrels per day for 2009, down 2.9% or 2.5 million barrels per day compared with 2008 where worldwide consumption of oil for 2010 is expected to increase by 1.4 million barrels per day or 1.7% to 85.2 million on the back of non-OECD demand growth.

You can see a description of our fleet on slide 6. After concluding the previously announced vessel swap with our sponsor earlier in the second quarter, the Assos and the Atrotos with the Agamemnon II and the Ayrton II, the partnership's fleet number 18 high-specification vessels with an average age of just three years and continues to remain one of the youngest fleets of its [style] and size in the world. All our vessels are chartered with strong counterparties such as BP, Morgan Stanley, OSG, Shell, and Trafigura.

The average remaining charter duration is 4.2 years and 10 out of 12 of our time charters have profit sharing agreements which provide us with significant upside when markets are strong, as was demonstrated through our results in previous quarters.

Slide 7 provides an overview of our charter coverage by vessel. We have extensive charter coverage in the medium term with close to 100% of our fleet under charter for 2009 and approximately 67% in 2010. In addition, six of our vessels are under long-term charters will be (inaudible) that is set to expire during or after 2014 at the earliest.

As pointed out in our earnings release earlier today, the global economic and credit environment has seen little change over the last quarter and there are no visible prospects for a recovery. We will continue to [experience] severe deterioration in the banking and credit world as well as the major economic slowdown whose duration is very difficult to forecast. The continued weakness in the product include tanker markets is widely alleged to have taken a substantial toll on both the period rates and asset prices, but the limited transactions and pictures taking place do not allow for a proper assessment of [current] market levels.

The continuing [poor] state of the spot tanker market have potential vessel deliveries for 2009 and as the outlook for global oil demand in 2009 remains weak, our oil factors are expected to have a further adverse effect on tanker vessel prices and period rates in the short to medium term.

We will have (inaudible) capital commitments to purchase or build vessels and we have amended a number of the terms in our loan facilities and our fleet charter covenants for 2009 and 2010 stands at approximately 167% respectively. However, the uncertain prospect for the rest of the year and the lack of tangible recovery signs for 2010 are likely to have an adverse impact on our results and financial conditions at the time particularly as vessels come up for rechartering.

And with that, I will turn the call over to the operator and take any questions you may have.

(Operator Instructions) John Chappell, JPMorgan.

Thank you. Good afternoon, Ioannis. So a couple questions about the amendment renegotiations with the bank. First of all, did they come to you or did you proactively seek out an amendment with your banks?

We proactively went to the banks after the end of the first quarter. In the past two months, due to the credit crisis and due to the lack of demand, what we have seen is a deterioration in the prices of tanker assets as well as other shipping assets. And we wanted to protect the partnership or potentially a distressed seller standing at the level that would have made us have a problem with our covenants. So proactively, we approached our syndicate banks and we sought a change in the two covenants that I have just mentioned to you.

Now, you laid out the LIBOR situation with the new covenants, but is there any impact whatsoever on your distribution policy given the amendment?

That is two separate things. If anything, we wanted to make sure that we changed our covenants so we can continue with our distribution policy. Our distribution policy is determined by overall market trends, what the charter rates will be in the future, what the business requirement will be in the partnership, the risks ahead and if anything, they change in the covenants helps towards the decision-making.

Okay. So the distribution will be strictly operational and the banks will have no say in it post this amendment?

That is correct.

Okay. Another question regarding the amendment as well. I know that you have in the past only talked about potentially issuing equity for growth opportunities. Now with the asset values falling and the strength of the MLP stocks in the US markets, have you explored the potential to issue equity just for debt repayment or to improve your financial flexibility?

As you know, we have a non-amortizing -- two non-amortizing facilities. One until June 2012 and the other until March 2013. That is staying the same even after the change in some of the terms of our loan agreements. So if it comes to issuing equity, we have to take other things into consideration, i.e., opportunities but as well as the fact that our unit price at this point is not at a level that will result given the market to any previous transactions.

So unless our unit price recovers and depending on charter rates that we can obtain for any potential vessels, that's one of the (inaudible) that will have equity -- an equity share amount.

Okay, one final one and then I will turn it over. The operating expenses in the second quarter, you addressed that. Is that the type of run rate we should look at going forward or is that a one-time quarterly anomaly?

The funding, we will -- our interest expense are comprised of a number of things. We have the LIBOR --

I'm sorry, Ioannis, the operating expenses.

The operating expenses, sorry. The operating expenses, as you remember last year, we had a similar occurrence of extraordinary or additional expenses. This relates to certain items such as spares on the back of unforeseen damages or accidental damages or extra [vetting] that we do in order to charter our vessels in the future. And the additional operating expenses in the first half amount to about 7% of the total OpEx. Like last year, so this year and probably in the future, these additional expenses will remain but we don't expect them to remain at a significant level.

Okay, understood. Thank you very much, Ioannis.

Ken Hoexter, Merrill Lynch.

Hi, Ioannis, this is Seth Lowry, in for Ken. If I could just stick with the covenant theme, can you talk about how valuation of your fleet is going to change going forward now that it's based on a charter attached basis with a significant amount of your fleet up for recharter next year? Who is going to be performing the valuation and how often and I guess what is the risk that could deteriorate further?

Sure, I mean the valuations from here on will be based on the charters attached to certain of our top-rated oil majors instead of charter free, [something] that ship brokers that provided valuations before on a charter free basis, they will provide valuations ahead with taking into account the difference between the value of our charters and what the period charters in the market for similar periods are currently. It's very difficult at this point in time to assess what period rates will be in the future and it is next to impossible to assess what asset prices will be.

One major issue has been the lack of transactions and in -- you can count in the number of one hand the number of transactions that have taken place in the MR product markets or the Suezmax market in the past three months. So in order to protect the partnership, we decided to change a number of our covenants and prolong the fact with the fleet covenant going up. We believe we are protected for the time being.

Okay, are you going to have to retest the covenants each time a charter is renewed on these vessels? And am I to understand that the valuation on a charter attached basis is for every single vessel in the fleet or did you only say certain vessels?

The vessels that will have -- they will have valuations conducted on the basis of charters attached are those vessels that are chartered to our upgraded oil majors. That answers your second question.

The first question is that every quarter in the past as well as in the future, we provide valuations to the banks and these banks -- these valuations are provided by independent ship brokers. So like in the past, so in the future these valuations will be provided. The only difference is that orders in the past, short order vessels were valued charter free, now will be valued on with charter attached. That's the only difference and that's -- (multiple speakers)

Okay, so this is done on a quarterly basis.

That has always been the case.

Okay, so no change to that. And then just lastly, how long typically are you -- do you expect to wait before a charter expires to renegotiate the contract associated with that vessel? And are you waiting longer than usual in the current down market or what are your expectations there?

Historically the negotiations of the charter has been done closer to the expiry. So no change there. And to remind you, most of our vessels that have charters expiring, it's at least nine months away, six to nine months away. So there's no change to that. Yet we continuously discuss with our charters about their period needs as well as to remind you the ship management company with whom we have the commercial agreement is qualified for long period business with all oil majors, which gives us an advantage to negotiate for future period rates with other people as well if need be.

Okay, great. Thank you very much.

Scott Burk, Oppenheimer.

Let's see, I wanted to ask a question. Could you quantify how much the value of -- including those charters, how much does that boost the value of your overall fleet maybe on a percentage basis?

As I said, these values, these valuations are provided by ship workers and different people have different ways to valuing this, the value of the charter attached. But as I mentioned to the previous question, the way that you value this charter since the difference between the value of the charter in the question versus the market rate of charter for an equivalent period. As I mentioned with you, the average rate of our charters approximately is $20,000. These are for the vessels that are expiring next year. And the average level of an equivalent charter today is between $13,000 and $15,000.

I want to repeat that not all our vessels with charter attached will be valued on that basis. These are only the vessels with the top-rated oil majors that we have for any top rated or any top rated oil majors. That means if in the future we fix with a new name but a top-rated oil majors, then the charter attached will be taking into account for our valuations.

Okay, I assume BP and Shell qualify as top-rated oil majors?

Right.

Okay. And wanted to ask -- from any of your charters, are you getting any pressure or any questions about potentially renegotiating rates given the huge discrepancy between your base rate and current spot?

No.

Let's see, then I wanted to also ask about -- we've seen some strategists here on Wall Street starting to talk about this being the end of the recession. Most of the commentary that we heard today was -- it sounded pretty -- not very good for the demand outlook for the near term, but are you starting to see any signs that would point to a recovery in, say, 2010 or '11 from any of your customers or any of the voyages that you are seeing with your ships?

I'm afraid not. And it's not only the demand picture that remains very weak, but it's also the credit market which remains very weak, which means that availability of credit for trade is not as available as before that this is cargo availability. And also it reduces availability of finance for companies that want to purchase vessels. So I'm afraid that we do not see a recovery and as I mentioned, the second quarter average below $10,000 for the MRs was the worst for actually 17 years since '92/'93. And in the year-to-date average, the average is the worst since 10 years, since '99. And if you look how the third quarter is going so far and the third quarter is historically a weak quarter, you are not optimistic about the near-term, about the level of the market.

Okay, but how long do you think -- right now if you look at the spot rates, there in the $2000 and $3000 range below cash breakeven and below low operating expenses even. How long can that last before some people start to buckle and scrap vessels or lay them up or something?

In the past, such very low levels have not lasted for too long, two, three, four quarters max. Yet it's difficult to make forecasts that won't make any forecasts. As I mentioned to you demand-wise, we don't expect us especially in the working world any significant increase, which means that you should -- these are the biggest consumers of oil. So it's very difficult to try to project demand without expecting too much and following (inaudible) a recovery.

Right. Okay, thank you.

Selman Akyol, Stifel Nicolaus.

Good afternoon. First of all, on the interest expense line, these are just more number-related questions because I think everything else I was looking for has been discussed. But interest expense we were looking to be up and it was -- came in above our estimate. Was that -- were there any one-time charges associated with renegotiating your credit facilities, anything that got lumped in there extra?

No, the increase in the debt compared to last year, we will have $46 million debt higher than a year ago. But also during the second quarter of last year, we accumulated something like $60 million more debt. So we have a higher interest expense simply because the average debt this time around was much higher than the average debt last time. And the only other extra that you have is something that we have called -- and I think in the previous conference call to everybody -- that nowadays we have to compensate at the banks for the funding costs, the bank's fund have (inaudible) LIBOR, which means that we have to compensate them for. Last quarter the cost was close to $400,000 and in the third quarter will be a similar number. So that's how the numbers add up.

All right.

We don't have any impact from these new covenants in the second quarter. That will start from the third.

Okay, thank you. And then this is two questions off the cash flow statement. Literally vessel advances on acquisitions and cash flows, there was $26 million and I understand it is a year-to-date number but what was going on there?

This has to do with the fact that as we have acquired Ayrton and Agamemnon II from our sponsor, we have to restate the financials to include per the terms of financials as our sponsor and us are considered for accounting purposes comparisons on the (inaudible). So this $26 million includes two things, includes a $3 million that our sponsor paid for the delivery of Ayrton when it used to be part of the Capital Maritime [Cape], so it doesn't have any impact in the partnership. And it includes also another $8 million that the partnership paid the sponsor for the extra compensation for the acquisitions of Agamemnon and Ayrton in return of Assos and Atrotos.

Okay, and then I presume also that --

So the problem is that we released a cash flow statement but you have a lot of the predecessor financials included as well.

Then that probably also explains the capital contributions by Capital Maritime as well for the $40 million?

Absolutely, that's correct.

Then the last question is I guess previously the sponsor had swapped in other tankers with longer charters. Would there be any opportunity to do that in 2010 if need be?

Well, if need be it can happen. I mean we still have at the sponsor level a number of vessels that if chartered they can become visible for the partnership. But it depends on the charter rates and it depends at what price. So at this point, I don't see that because of where the charter rates are quite low, but we will have to wait and see.

All right, thank you very much.

Justin Yagerman, Deutsche Bank.

Good morning. This is Mike Webber in for Justin. I'm good. Just a couple of quick questions. Just jumping back onto the waiver, I know you talked about it a bunch but how long --?

It is not a waiver, Mike. It is not a waiver. It is an amendment.

An amendment, excuse me. How long -- what does that amendment I guess expire? Is that for the duration of your facility or are you going to have to come back to the table and renegotiate that at some point?

As we state in the press release and as we stated early in the call, this amendment is effective and valid until end of June 2012. It is not a waiver. We went to the banks proactively and we asked them to change a couple of the terms.

All right, and I guess kind of piggybacking on some of the other questions, maybe coming at it a different way, you guys -- you picked up 7.5% from a loan to value perspective for 65 basis points of LIBOR and you've got the new valuation strategy as far as valuating your fleet. Can you maybe quantify how much room that actually provides you guys as far as like where you are now and how much breathing room you have? Because right now it's kind of difficult to see exactly how much breathing room you actually picked up for this.

Well, I'm afraid as I mentioned to you earlier, it's very difficult today to assess properly the volumes of assets. And one of the problems in the past has been that many ship brokers did not want to value assets at all and the range was pretty broad. And in order to avoid let's say any impact on our covenants from this valuation that ship brokers provided, we added some more room as we explained.

I think this room to 80% and given the way its valuation (inaudible) but at the same time, we have seen a very difficult market with very few transactions and we have seen significant drops in the tanker prices. So it's very difficult to assess how big or how small this extra room is. But I think that it is a definite improvement compared with what we had before.

All right, fair enough. And then I guess from a general perspective looking at vessel valuations and then you guys certainly have a little bit of dry powder, what signs do you look for and I guess specifically, what do you look for first to give you an indication that vessel values might be bottoming? I know you guys would probably like to acquire something that has long-term -- a long-term charter on it, which is going to skew the valuation. But just from a pure asset perspective, is there anything that you look at first kind of a first indication to give you an idea that asset prices are going to be bottoming soon?

The number of transactions is lumpy, but currently the number of transactions is very low. As I mentioned, you can count in the number of (inaudible) one hand what happened in the second quarter. And certainly we would look for signs of demand, demand for oil picking up such that it would be certainly encouraging.

Okay, all right. I appreciate your time. Thanks.

(Operator Instructions) Darren Horowitz, Raymond James.

Good afternoon. Just a couple of quick questions. First, when you look at improving security around future distributions, are you considering doing anything to your replacement capital expenditures either kind of pushing that out or anything that you can do there on your recommended reserves to kind of enhance cash flow coverage?

That is not the plan today and we have kept actually purposely the calculation of the capital expenditure, replacement capital expenditure on a high level in order to remain prudent going ahead. As I mentioned earlier, the coverage of our available cash was a 1.1 times in Q2, the same was in Q1. And there is quite high predictability in our income in the next two quarters. So at this point, we don't plan to change that.

Okay, so it's still fair to assume about $15 million in annualized maintenance CapEx?

$15.5 million, yes.

And then my second question, just a quick one. Obviously you've talk about what's going on in the period market to a great extent, but can you give us some insight specifically around the Attikos since it's up for recontract in September?

We have been in negotiations with the charters and we are in the midst of it. The current indications are lower compared to what Attikos is earning today in excess of $13,000 plus. And as we are in the middle of negotiations, I cannot say at what level it will be fixed but most likely it will be at a low rate.

Okay, thanks, Ioannis.

(Operator Instructions) As it would appear that we have no further questions, I would like to turn the conference back over to you, sir, for any additional or closing remarks.

Thank you, Jessica, and thank you again, everyone, for joining us today. I understand there was a small interruption in the phone. Apologies for that. But if you have any additional questions, please don't hesitate to give us a call. Have a great day and thank you. Goodbye.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.