Capital Product Partners L.P.

Thank you for standing by, and welcome to the Capital Product Partners Third Quarter 2023 Financial Results Conference Call. We have with us Mr. Jerry Calacaratos, Chief Executive Officer, Mr. Spiros Leosis, Chief Commercial Officer, and Mr. Nikos Kalopoulos-Karakos, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you have a question, please press star 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today, November 13, 2023. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, equity returns, and future debt levels, our ability to pursue growth opportunities Our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation, as well as our expectations regarding market fundamentals and the employment of our vessels, including re-delivery dates and charter rates, may be forward-looking statements as such as defined in Section 21 of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand the call over to your speaker today, Mr. Calo Gratos. Please go ahead, sir.

Thank you, and thank you all for joining us today. As a reminder, we'll be referring to the supporting slides available on our website as we go through today's presentation. In addition to our quarterly earnings, we announced today an important strategic transaction for the partnership. In the interest of time, we will go through a shorter than usual presentation of our quarterly earnings, and we'll then move on to the transaction and what it all means for capital product partners. Starting with slide three and the partnership's financial performance, net income for the third quarter of 23 was $17 million. Our Board of Directors has declared a cash distribution of 15 cents per common unit for the third quarter of 2023. The third quarter cash distribution will be paid today, November 13th, to common unit holders of record on November 6th. Finally, following the Cape Agamemnon's delivery to her new owners last week, the partnership's current fleet charter cash at 100% with the remaining charter duration corresponding to 6.5 years and contracted revenue backlog of more than 1.7 billion. Now turning to slide 4, total revenue for the third quarter of 2023 was 95.5 million compared to 71.9 million during the third quarter of 22. The increase in revenue was primarily attributable to the revenue contributed by the four new building vessels delivered to the partnership between the fourth quarter of 22 and the second quarter of 23, as well as the increase in the daily rate earned by two of our LNG carriers since September 2022. Total expenses for the third quarter of 23 were 51 million, compared to 40.4 million the third quarter of 22. Total vessel operating expenses during the third quarter of 23 amounted to 22.3 million compared to 17 million during the third quarter of last year. The increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet and costs incurred during the scheduled maintenance of certain of our ships. Total expenses for the third quarter of 23 also include vessel depreciation and amortization of 21.9 million compared to 16.2 million in the third quarter of last year. The increase in depreciation and amortization during the third quarter of 23 was mainly attributable to the net increase in the average size of our fleet. General administrative expenses for the third quarter of 23 amounted to 2.6 million compared to 2.8 million in the third quarter of 22. Interest expense and finance costs increased to 27.8 million for the third quarter of 23 compared to 14.9 million for the third quarter of last year. The increase in interest expense and finance cost was mainly attributable to the increase in the partnership's average indebtedness and the increase in the weight average interest rate to 6.5 percent from 4.4 percent in the third quarter of 22. The partnership recorded net income of 17 million for the quarter compared to net income of 11.5 million. That is excluding the gain on sale of vessels we recorded in the third quarter of last year. Net income per common unit for the quarter was 84 cents compared to 57 cents per common unit in the third quarter of last year, once again excluding the gain on sale of vessels recorded a year ago. On slide 5, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure. We have generated approximately $41.7 million in cash from operations for the quarter before accounting for the capital reserve. We allocated $34.4 million to the capital reserve, a decrease of $0.6 million compared to the previous quarter due to the net decrease in the rate of amortization of our debt. After deducting to the capital reserve, the adjusted operating surplus amounted to $7.2 million. On slide 6, you can see the details of our balance sheet. As of the end of the third quarter, the partners' capital amounted to $664.5 million, an increase of $26.1 million compared to $638.4 million as of the end of last year. The increase reflects net income for the nine-month ended September 30th, other comprehensive income of $2.1 million relating to the net effect of the cross-currency swap agreement we designated as an accounting hedge, and the amortization associated with the equity incentive plan of $2.8 paid during the period in a total amount of 9.2 million, and the cost of repurchasing our common units under our unit repurchase program for an aggregate amount of 4.1 million. Total debt increased by 303.1 million to 1.6 billion, compared to 1.3 billion as of year-end 2022. The increase is attributable primarily to the drawdown of a Total costs of the end of the quarter amounted to 108.5 million, including restricted costs of 11.7 million, which represents the minimum liquidity requirements under our financing arrangements. At this point, I would like to move to the second part of the presentation, and in particular, to slide number eight. I'm very pleased to talk about today what we consider a milestone transaction for the partnership and one that I believe will propel Capital Product Partners to a new chapter after 16 years of public presence as an MLP. I would like to start with the decision of the board to change the partnership's name. The new name, which we expect to take effect by year end, is Capital New Energy Carriers LP, and it will come with a new ticker symbol. I'm starting with this symbolic move as it signifies that what we're aiming to do here is more than an asset transaction. It is a transformation of the partnership to reflect our new focus primarily on LNG shipping, but also the wider gas business related to the energy transition, and the intention as part of this transaction to move away from the MLP model and convert into a corporation. This strategic transformation will be underpinned by the acquisition of 11 latest-generation two-stroke LNG carriers in a $3.1 billion transaction, with delivery starting from later this quarter and up to March 2027. The first five vessels delivering this and next year have medium- to long-term charters in place, with revenue-weighted average frame period of 7.5 years to highly reputable counterparties, with a total of over $1.4 billion in contracted revenues. Once all vessels have been delivered, we expect CPLP, or CNEC if you prefer, to transform to the largest US-listed operator of two-stroke LNG carriers compared to the current fleet of other US-listed companies, and one of the largest US-listed shipping companies by enterprise value. Importantly, together with a focus on the LNG business, CPLP has committed to the opportunistic divestment from its container vessels, while it has secured the right of first refusal on two very large ammonia carriers and two liquid CO2 carriers, which are expected to play a significant role during the energy transition together with natural gas. Now turning to the next slide, you can see how we expect to fund this strategic acquisition. Total vessel acquisition cost is 3.1 billion, which translates roughly into 8.4 times full-year EBITDA for the 11 new LNG carriers. This estimate is based on the employment secured for the five vessels per day for the remainder six, in line with the current medium- to long-term period market. We believe the acquisition to be attractively priced in view of the uniqueness and size of this fleet, comprising only latest-generation mega-LNG carriers, the tenor and the quality of the contracted cash flows, as well as the delivery dates of the vessels and the particular of the open vessels, which coincide very well with the next phase of significant liquefaction capacity coming online from 2026 onwards, as we will discuss later. The acquisition will be funded by a rights offering of 500 million, which is open to all our unit holders. In addition to commercial debt and an attractively priced 220 million unsecured seller's credit provided by Capital Maritime to ensure that the transaction is fully capitalized even without the sale of any container assets. Turning to the next slide, we describe in more detail the 500 million rights issued on the seller's credit. We chose the rights issue path because we wanted to make sure that all existing unit holders have the right to participate in this transformative transaction. Capital Maritime is backstopping 100% of the transaction without any fee at an attractive price of a minimum of $14.25, which translates into a 9.6 premium to the last closing price. Holders of common units as of record date of November 24th will receive the right to acquire up to 1.7 units for each unit they hold. The closing of the rights offerings is expected to take place on December 15th. As far as the seller's credit is concerned, it is attractively priced at 7.5% all-in. It is unsecured and has a maturity in June 2027. We believe that the capital maritime support is an important part of this transaction and demonstrates capital maritime's continued alignment with the long-term success of the partnership. In the appendix on slide 24, You can find more details with regard to the deal structure and timing of payments. On the next slide, you will find the 11 vessels together with the breakdown of total contracted revenues and average day rate for each year, as well as their deliveries. These are all sister vessels built or under construction at Hyundai Seabed in South Korea, the largest sea builder in the world. These truly very high-specification vessels represent the latest generation of propulsion, containment system, reliquefaction plant, and energy-saving technologies in LNG shipping. Importantly, the propulsion arrangement with mega, low-pressure engines and sub-generators ensures a reduction of methane slip by 50%, even compared to first-generation low-pressure two-stroke vessels, and close to 90% compared to TFTE vessels. The first vessel, which was delivered from Hyundai to Capital Maritime at the end of October, is on a three-year, highly lucrative charter to Qatar Energy and Trading. The Axios II is expected to commence a bearable charter to Boni Gas and Trading in the first quarter of 2025, and in the meantime, we expect here to be fixed for a 12- to 15-month time charter before year-end. The Asos, which delivers in May 2024, is fixed on a 10-year charter to Tokyo Gas, a Japanese utility, similar to the Apostolos that follows thereafter, which is fixed to Jera. Finally, the Acturas will also enter into a seven-year bearable charter in July of 2024 with Pony Gas and Trading. The remaining six vessels are not yet committed and have highly attractive delivery dates as today's shipyards offer typical capacity in the second half of 2027 onwards. Turning to the next slide, after the delivery of all 11 additional LNG carriers, Capital will have a very modern fleet of 18 two-stroke LNG vessels, the largest in the U.S. public markets as of this point, with 6.5 years of average firm charter duration that can extend to 9.6 years, including options. I will now hand over the floor to Spiros Leousis, our chief commercial officer, who will talk about the prospects of the LNG market, and especially from 2026 onwards, where we have the most exposure. Importantly, Spiros will also explain why we believe that two-stroke vessels like ours will gain even more traction and value going forward as environmental regulations and market-based measures become more prevalent.

Thank you, Jerry, and good morning, everybody. This is indeed a very exciting transaction from where I'm sitting. As you know, and you can also see on slide 13, LNG is prevailing as the main supply source of natural gas, as the ability to move natural gas in the form of LNG beyond the constraints of the pipeline not only gives producers and consumers more flexibility, but has become increasingly more important due to geopolitical issues. Hence, LNG shipping is an integral part largest owners worldwide of modern two-stroke LNG vessels. Then to the next slide. The global liquefied natural gas market capacity is expected to increase in the coming years by 70 percent by 2030. The chart that you see on this slide refers to the global LNG production capacity, which is expected to exceed 750 million tons annually in 2030, up from 465 million tons in 2023. The increase in liquefaction involves projects under construction that have already received the final investment decision. A crucial element for the prospects of the LNG shipping market is that most of the new production will be installed in the U.S. Gulf, with the main buyers located in the Far East and Europe, increasing the demand for LNG shipping due to higher tonnage. 2023 so far has been another very strong year in terms of FIDs for new liquefaction projects, With next decade, SEMPRA and venture global projects taking FID amounting to additional 50 million tons per annum of FID from 2026 and 2027 onwards. We expect the trend for FIDs to continue as a number of projects in the U.S. are reaching maturity as government support around the world for new projects has been an important catalyst. We expect the new players and their off-takers to drive the demand for new vessels when our open ships will be delivering from the Aegean. On the next slide, slide 15, we'll discuss the supply of LNG carriers. Here, you can see the composition of the global LNG fleet. The LNG fleet on the water stands at 736 vessels, and the order book is around 300 vessels. The order book to fleet ratio is slightly lower than the peak of 52% of last January, as new builds deliver and ordering has slowed down. From the total of about 300 new vessels, only 29 vessels currently are open between now and 2028, equivalent to 10% of the existing order book. Thus, the vast majority of orders are committed to projects like the Qatar expansion, LNT Canada, and others. Worth noting that the capital open positions will represent around a fifth of the market for uncommitted vessels, positioning us very well at a time when we expect demand for new vessels to accelerate. Modern vessels, like the ones under the acquisition, are larger and more economical, incorporating significant changes in propulsion technology and LNG tank construction. At the same time, as emissions regulations tighten with EXI, CII and other regulatory initiatives, and charters are placing an increased focus on ESG and specifically carbon dioxide emission equivalents, steam and DFD vessels will become even less competitive going forward, with two-stroke vessels commanding a significant premium, both in terms of charter rate and utilization. The older, smaller steam turbine fleet is expected to be gradually phased out, either through scrapping or repurposing in storage and regasification projects. We should point out that the new vessels are equipped with a megapropulsion arrangement, which allows for a low gas supply pressure and is better suited for use of boil-up gas as a fuel, while at the same time having lower capital expenditure, operational expenditure, and NOx emissions than current generation engines. The key driver behind the popularity of the new arrangement is the exhaust recycling system, which improves methane slip by up to 50% as we mentioned previously when combined with sub-generators. We'll discuss more on the benefits of the new vessels in the following slides. looking a bit more into the unit freight cost calculations and the relevant differential between the different type of vessels. As we mentioned above, the key drivers for the differential are more efficient propulsion with savings up to 100 tons per day of fuel, the larger size of vessel, 174,000 cubic meters versus 145,000 or 160,000 cubic meters, the improved containment system resulting in lower boil-off, so 0.03 versus 0.15 daily evaporation of cargo, the lower long-term maintenance costs due to simpler proportional arrangements, and from 2024, the tightening of emissions regulations with the monetization of carbon dioxide and methane. On the first graph on the right, we have calculated the equivalent daily differential for a U.S.-Japan round-trip voyage between a two-stroke vessel and a steamship or a DST. The main parameter is the commodity price, and as we can see, in a $10 per mmppu environment, The daily difference to a DFT exceeds $30,000 per day, while to a steamship is more than double to that, exceeding $70,000 per day. Worth noting that today's LNG JKM price is around $17 per MBTU. On the next graph, we have calculated the emission profile for each type of ship, with the two-stroke vessels having less than half of the emissions, reducing significantly the EPS cost for the charterer. For a US-EU trade, post-2026, when 100% of the emissions will need to be accounted for with emission allowances, a steamship will have to incur an additional cost versus our vessels of around $17,000 per day, assuming an $80 per ton of CO2. Based on the unit freight cost and emission differential, we expect that new vessels will be in high demand for at least the next decade, as fleet renewal processes, while at the same time they will be able to command a significant premium corresponding to the efficiency gain the charterer will record when utilizing them. This is already apparent today, as we have a clear three-tier market, but with the gradually increasing pressure on all their vessels from EXI and, importantly, from ETS, we expect to see even larger premium to be captured by two short vessels like ours. The next slide provides us with a snapshot of the market outlook. The main two drivers for a healthy LNG freight market are the shipping capacity required to transfer the new LNG that will come online and the need for fleet renewal. With a conservative assumption that only vessels above 30 years will head to scrapyard, the shipping balance for 2026 is in deficit by 7 vessels, while for 2027 this is up to 57 vessels in additional requirements. While we expect that part of this demand will be covered by new orders, the current CDF capacity in both Korea and China cannot support the required growth, leaving the market short of vessels and adding significant value to our 2026 and 2027 open positions. Overall, we will aim to be opportunistic in our approach as to when we will fix these vessels, depending on what we see in terms of market dynamics. While in the past we have fixed vessels only a few months after contracting them from the CPI, the majority of the vessels have been fixed closer to delivery in order to capitalize on the scarcity value. In addition, in our chartering strategy, we will make sure that we keep staggered expirations in order to maintain exposure to the market and reduce market cycle risk. This is all from me. I will now hand the floor over to Jerry. I'll be happy to answer your questions later.