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Executives

Ioannis Lazaridis – CEO and CFO

Analysts

Jonathan Chappell – Evercore Partners

Justin Yagerman (Josh)– Deutsche Bank

Mike Webber – Wells Fargo

Paul Jacob – Raymond James

Ken Hoexter (Wilson) – Bank of America/Merrill Lynch

Capital Product Partners L.P. (CPLP) Q4 2012 Earnings Call January 31, 2013 10:00 AM ET

Operator

Operator

Thank you for standing by and welcome to the Capital Product Partners Fourth Quarter 2012 Financial Results Conference Call. We have with us Mr. Ioannis Lazaridis, Chief Executive Officer and Chief Financial Officer of the Partnership. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and-answer session. (Operator Instructions)

I must advise you that this conference is being recorded today,Thursday, January 31, 2013.

The statements in today’s conference call that are not historical facts, including our expectations regarding developments in the markets, our expected charter coverage ratio for 2013, and expectations regarding our quarterly distribution may be forward-looking statements, such as defined in Section 21E 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. Lazaridis. Please go ahead, sir.

Ioannis Lazaridis

Thank you, [inaudible], 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 one, I’m going to make some comparison on today’s call between the fourth quarter of 2012 and the fourth quarter of 2011, as this is the most meaningful analogy in our business.

On January 22, 2012, our Board of Directors declared a cash distribution of $0.2325 per common unit for the fourth quarter of 2012, in line with the managements annual distribution guidance. The fourth quarter common unit cash distribution will be paid on February 15, 2013 to unit holders of record of February 8, 2013.

Our partnership’s operating surplus for the quarter amounted to 22.5 million or 19.2 million adjusted for the payment of distributions to the Class B unit holders, following the issuance of 15.6 million Class B convertible preferred units during the second quarter of 2012.

As announced, on January 7, 2013, we acquired from our sponsor Capital Maritime and Trading Corp. two 8,000 TEU container vessels, with a three to seven year time charter employment to industry leader Maersk line.

As consideration for the acquisition, the partnership contribute the VLCC Tankers of Alexander the Great and Achilleas. As a result of this transaction, we incurred a non-cash impairment charge of $43.2 million, which we will discuss shortly.

In addition, we have extended the employment of M/T Amore Mio II with BP Singapore for floating storage at the gross rate of $17,500 per day, for a additional nine months, commencing from March of 2013, with a charter’s option to extend for an additional three months.

Another tanker Arionas was also extended for another 12 months, at the same rate with our sponsor, Capital Maritime and Trading with the earliest expected redelivery in September 2013. As of the end of the fourth quarter, the average remaining charter duration of the partnership stands at 3.7 years, with charter coverage of 81% for 2015.

Turning to slide 2, our revenues for the fourth quarter of 2012, were 38.3 million, including 0.3 million in profit sharing revenues compared to 44 million in the fourth quarter of 2011. The partnerships high revenues in the fourth quarter of 2011, reflect primarily the fact of following the acquisition of crude carriers on September 30, 2011. A number of the partnerships vessels operating on the voyage tankers earning voyage income of $9.7 million, compared to zero voyage income in the fourth quarter of 2012, as all of our vessels were on period.

Total expenses for the fourth quarter of 2012 were $69.5 million compared to 35.3 million in the fourth quarter of 2011, primarily driven by an increased and expense, resulting from the impairment charge, and the decrease in voyage expenses, as the partnerships vessels were operating on the period charters during the fourth quarter of 2012.

The impairment charge, which is a non-cash item, represents the difference between the carrying values and the fair market values of M/T Alexander the Great and . On the day they were sold by Capital Products to our sponsor, Capital Maritime in exchange for the motor vessels Archimidis and Agamemnon, the two containers.

The vessel operating expenses for the fourth quarter of 2012 amounted to 11.2 million compared to 11.9 million in the fourth quarter of 2011, including a $4.7 million charge by a subsidiary of our sponsor Capital Maritime, for the commercial and technical management of our fleet, under the terms of our management agreements, compared to $7.8 million in the fourth quarter of 2011.

Our total expenses for the fourth quarter of 2012 also include 12 million depreciation compared to 12.3 million in the fourth quarter of 2011.

General and administrative expenses for the fourth quarter of 2012 amounted to 2.3 million, which includes a 0.8 million non-cash charge, related to the partnership’s omnibus incentive compensation plan.

Total other expense, net for the fourth quarter of 2012 amounted to 3.8 million compared to $7.6 million for the fourth quarter of ’11. As the result of the decrease in the interest expense and finance cost for the fourth quarter of ’12, which reflects expiration of certain interest rate drops and a reduction of the partnership’s total debt, when compared to the fourth quarter of 2011.

The partnerships net loss for the quarter was 35 million, including the impairment charge. Excluding the impairment charge, a net income of $8.2 million would have been reported. After taking into account the 3.3 million deferred interest in net income attributable to the holders of 15.6 Class B convertible deferred units issued during the second quarter. The result was $0.55 net loss per limited partnerships unit, which was $0.61 lower than the $0.06 net income per unit from the previous quarter, ended September 30, 2012, and $0.57 lower than the $0.02 net income per unit in the fourth quarter of 2011.

If the reductions in income resulting from the deferred interest in income attributable to the Class B unit holders and the impairment charge were excluded, the result, per limited partnerships unit for the quarter ended December 31, 2012, would have been a net income of $0.12, a significant improvement to the $0.02 net income per unit reported in the fourth quarter of 2011.

Moving on to slide 3, you can see the detail of our operating service calculations, that determined the distributions to our unit holders compared to the previously quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release.

Having certain non-cash items backed into income would have generated approximately 22.5 million in cash flow operating, before accounting for the Class B preferred units distribution. After adjusting for the Class B units, the adjusted operating surplus amounted to 19.2 million, which translates to a 1.2 times common unit coverage.

On slide 4, you can see the details of our balance sheet. As of December 31, the partners capital amounted to 573.8 million, which is 56.5 million higher than the partners capital as of December 31, 2011. This increase primarily reflects the issuance of the 15.6 Class B units, which raised gross profits of approximately 140 million. Combined with a payment of 73.3 million in common and Class B distributions since December 31, 2011, and the net loss for the fourth quarter of 2012.

As of December 31, 2012, the partnerships total debt has decreased by 175.2 million, to $458.4 million, compared to a total debt of 633.6 as of December 31, 2011.

In connection with the issuance of the Class B units, the partnership executed amendments to it’s three credit facilities and prepaid debt of 149.6 million, also utilizing part of it’s [inaudible] balances. The amendments provide for a deferral of all the remaining schedule optimization payments that were due between 2012 and 2015, inclusive, and the rates of the partnerships credit facilities, until March 31, 2016.

Also, December 31, 2012, the partnership had swapped 59.1 million of its debt in to fixed rates, with a remaining 399.3 million of total debt of 458.4 million is in floating rates. To remind you, the swaps of 59.1 million expire at the end of March 2013.

Overall, our balance sheet remains strong with a net debt to capitalization of 39.2% and with partners capital representing 53.6% of our balance sheet.

Turning to slide 5, you can see our fleet list. The partnerships average age stands at 5.8 years and comprises of 18 product tankers, 4 Suezmax crude tankers, 2 post Panamax 8,000 TEU container vessels, and 1 capesize bulk carrier.

The young age and high specification of our fleet, as well as the oil major qualifications for long-time employment of our sponsor, and it’s extensive network of relationships with charters and liners, have distinct competitive advantages for the partnership, especially in today’s markets with increased focus on safety, security, and financial strength.

Turning to slide 6. In line with our business model of providing full period coverage for our fleet, we have secured employment for 81% of the partnerships total fleet days for 2015. The remaining duration of our charters, excluding the vessels chartered to OSG, as they are subject to on-going discussion, stands at 3.7 years.

Turning to slide 7, we announced on January 7, 2013 of the partnerships acquired from Capital Maritime, two post Panamax container vessels, the M/T vessels Archimidis, and Agamemnon.

Both vessels are employed on time charters with the industry leader Maersk Line, at the gross day rate of 34,000 a day. With earliest redelivery in November 2015, and August 2015, respectively.

Maersk Line has the option to extend the charter of both vessels for an additional 4 years at the gross rate of 31,500, and 30,500 per day, respectively for the fourth and fifth year, and 32,000 per day for the final two years.

If all options were to be exercised, the employment of the vessels would extend to July 2019 for the motor vessel Agamemnon in December 2019 for the motor vessel Archimidis.

As [inaudible] consideration for the acquisition of the two container vessels, the partnership contributed the VLCC tankers Alexander the Great and Achilleas to Capital Maritime, both of which were under charter to Capital Maritime at $28,000 per day, at the day of the transaction.

The partnerships diversification into the container market, with the addition of these two 8,000 TEU container vessels, provides longer-term cash flow visibility, allows us to diversify outside this exposure, and enter into a segment with attractive long-term fundamentals.

Turning to our fleet employment update for the fourth quarter of 2012, we are pleased to announce that BP Singapore has extended the time charter employment of M/T Amore Mio II for floating storage at the gross rate of $17,500 per day, from March 2013 until February 2014, inclusive of charter option to extend for further three months.

In addition, the M/T Arionas was extended it’s – has extended it’s employment with Capital Maritime for an additional 12 months at the same rate of 15,800 a day, with earliest expected delivery in September 2015.

As announced on the 14 of November 2012, our sponsor Capital Maritime, has exercised its option to extend the time charter employment of it’s M/T Aias and Amoureux for a second year at increased gross day rate of $24,000. In addition to the increased gross rate of 24,000, the vessels continue to earn 50/50 profit share on actual earnings settled every six months.

I would like to remind you that Capital has the option to extend the time charter employment for a third year at $28,000 per day, with the same profit share arrangements. All transactions were unanimously approved by the conference committee of our Board of Directors.

As of December 31, 2012, the partnership had three IMO II/III chemical product tankers on long-term bare boat charters to subsidiaries OSG. These charters were scheduled to terminate approximately in February, July, and September of 2018, respectively. And at rates that are substantially above current market rates.

On November 14, 2012, OSG made a voluntary filing for relief on the chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the district of Deleware. OSG has requested that the partnership reduce the chart rates for the remaining terms to substantially lower rates. The partnerships has been in discussions with OSG regarding this matter.

No assurance can be given that will reach an agreement with OSG regarding the remaining duration, rate, and terms of the charters, or arise from the bankruptcy proceedings, or if any such agreement is reached, that it will be approved by the Bankruptcy Court

Turning to slide 9, we review the product tanker market developments in the fourth quarter of 2012. The average spot earnings for the fourth quarter of 2012 close to doubled when compared to the previous quarter, has increased Japanese demand for Naphtha, in the east, early in the quarter coincided with Hurricane Sandy in the U.S. east coast in late October and propelled product tankers spot rates in the U.S. Gulf and the Atlantic to very high levels.

Our ship availablilty was disrupted due to increased waiting time for loading and discharge. Spot rates came off as trading routes return to normality after the passes of the hurricane, but increased arbitrage opportunities to the Atlantic, and continued activity in these sustained spot rates at healthy levels until the end of the fourth quarter.

Product tanker period market activity improved during the course of the fourth quarter of 2012, as more charters sought to take period [inaudible] and a slightly higher time charter rates compared to the third quarter.

Overall, the year 2012 was a very active year for the medium range period market, with an estimated 180 fixtures when compared to 85 fixtures in 2011.

Analysts expectations regarding overall demand for product tanker for the 2013 year has been revised upwards to 4.2%, as structural changes in the refinery industry. With the increased refinery capacity east of Suez and increased exports in the U.S. gulf, are expected to result into increased long haul product movements and ton miles.

On the supply side, net fleet growth for medium range and handysize product tankers for 2013, is forecasted to be in the region of 3.6%. However, I would like to remind you that the product tanker orderbook continued to experience substantial slippage during 2012, as approximately 55% of the expected MR and handysize tanker [inaudible] deliveries were not delivered on schedule.

We believe the current low product tanker orderbook is amongst the lowest in the shipping industry. And given the demand from the [inaudible] and the orderbook slippage should positively affect spot and period charter rates going forward.

Turn to the next slide. We discuss the Suezmax tanker market, which is the only crude market exposure we have. The Suezmax spot market improved towards the end of the fourth quarter, has increased demand out of West Africa and the U.S. – to the U.S., and delays in the [inaudible] rates, boost rates considerably higher from the low rates experienced during most of the fourth quarter of 2012.

The IEA revised upwards it’s oil demand ratings for 2012, following stronger than expected demand data, and signs of improving Chinese sentiment to 89.7 million barrels a day, and currently expects a 1.1 million per day rise in oil demand in 2013, to 90.8 million barrels per day.

Suezmax tanker deadweight demand is expected to grow by 5.2% for the full-year 2013, with analysts expect net fleet growth for the year of 5.6%.

Slippage for the Suezmax orderbook for 2012 continue to affect tonnage supply, as approximately 34% of the expected crude tanker billings were not delivered on schedule. Industry analyst expect the crude tanker orderbook and slippage in consolations to increase going forward, due to the historically weak spot market, the soft shipping finals market, and downward personal asset values.

Suezmax demolition remained robust in 2012, as 3.2 million dead weight tons was removed from market, or the equivalent 4.4% of the fleet, the highest level since 2002.

Turning to the next slide, and given the partnerships recent acquisition of two post Panamax container carriers, I would like to give you an overview of the container market. Demand growth for the global book rate is expected to remain quite robust, at 6.1% for 2013, and 6.8% for 2014, according to analysts.

Demand growth in the container industry is driven mainly by trade developments and increased containerization of goods, as a addition to steady growth in the trans Pacific and the Far East-Europe routes.

Intraasia trade remains strong and increased demand from emerging economies supports the continued expansion of the north/south rates. Demand for the post Panamax vessels has increased relative to smaller container vessels over the last few years, due to the so called cascading effect.

As liner company in the effort to decrease container unit cost, and achieve higher economies of scale, have been replacing smaller ships in various routes with larger post Panamax vessels.

Period demand for high specification post panamax vessels of this size, with the ability to slow steam such as Agamemnon and Archimidis, have remained healthy as supply in this segment is quite limited.

Increased focus on slow steaming across the container industry has worked towards a restricting supply at the time when the container industry is facing a declining orderbook, with slippage running at 34% for the full-year of 2012.

In addition, the container idle vessels was estimated at circa 5% of the container fleet at the end of 2012, and largely not expected to be re-commissioned as a majority of these vessels are outdated designs and sizes.

As a result, analyst expects demand to help [inaudible] supply in 2013, as net fleet growth for the year is expected at circa 5%.

Turning to the last of slides. We are very pleased to have completed a number of very important transactions for the partnership during 2012. First with the issuance of 140 million of Class B convertible units, leading to the prepayment of a significant part of our debt, and the deferral of the partnerships remaining debt amortization.

Secondly, with the acquisition of the two 8,000 TEU container vessels with long-term employment to highly reputable counter party Maersk Line, that’s exposing the partnership to a sector with attractive long-term fundamentals, and finally, by continuing to secure attractive period deployment for our fleet.

Taking in to account these steps, in conjunction with the expected improvement and the fundamentals of the product tanker market going forward, the improved charter coverage of our fleet following our entry in to the container market, and the decreased exposure to the crude tanker markets through the disposal of the two vessels, all should positively affect the future of our cash flows.

After taking in to account the recent developments in OSG, one of our charters, I would like to reiterate the rate of commitment to the $0.93 per unit annual distribution guidance going forward, and the continued enhancement of our financial flexibility in order to pursue growth opportunities and forge a pathway to distribution growth.

And with that operator, let’s open the floor to questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from Jon Chappell of Evercore Capital.

Jon Chappell – Evercore Partners

Thank you, good afternoon, Ioannis

Ioannis Lazaridis

Hi John, how are you?

Jon Chappell – Evercore Partners

Very good, thanks. It's Evercore Partners as I'm sure you're aware. But so question on OSG. Thanks for the update on that. Just wanted to get a little bit more color on whether they're current with their payments or not. And also are these ships still operating for them as you go through the negotiation process?

Ioannis Lazaridis

They are current with their payments. You understand that since we are in discussions with OSG, we cannot say much. But on top of the statement that it's on the press release and what I mentioned in the conference call, I'm quite optimistic about the outcome of our discussions involving all these fleet vessels.

But as you know, in every bankruptcy case, there are multiple contingencies in the bankruptcy court. So you have to bear with us on this. But so far as I mentioned, they have been current with their payments.

Jon Chappell – Evercore Partners

I do have a bunch of follow ups, but I guess I'll let it go since you probably can't say very much.

So you do a bunch of product tankers rolling off their existing contracts in 2013. As you mentioned, the spot markets have gotten a little bit better. And the contract markets firmed a little bit. How far in advance do you think you'd like to either extend those contracts or lock them into new charters to take advantage of the current strength given there's still some uncertainty in the total tanker market for this year?

Ioannis Lazaridis

I believe that the product tanker market, the fixture activity that we saw last year, 180 fixtures in total compared to 85 in 2011 shows that there is a reduced amount of uncertainty about the prospects and about the positive effect of the new refinery openings going ahead.

We have nine medium rates tankers opening throughout 2013. One is in the first quarter, four in the second quarter, and four in the third quarter. Of those nine, seven are already with Capital Maritime. So gradually, we will make the announcements as these vessels come up for renewal.

Jon Chappell – Evercore Partners

Are you seeing any interest from charters given that optimism in the broader market to either try to extend earlier than expected or maybe to take some of the vessels away from Capital?

Ioannis Lazaridis

As I said, there is increased charter interest. The question is the duration and the rate. And I think that both rates and durations have improved compared to at least the third quarter in 2011.

So there is a positive sentiment in the product tanker industry. And most of our exposure in terms of upside going ahead is through these nine medium rates tankers that come up for renewal.

But we will discuss up to the point that the vessels come up for renewal to be able to get the best terms for us.

Jon Chappell – Evercore Partners

Okay, and then just one last quick one. The Amore II or the Amore Mio, on the floating storage to BP, how did you kind of balance putting that ship into a floating storage for a period of time versus trading opportunities versus the counter party? I mean having BP versus maybe having some of the other counter parties probably gives a little bit more comfort with the cash flow visibility from that ship.

Ioannis Lazaridis

The vessel was with BP and simply, they extended the charter. So the employment they wanted as floating storage, but we have a strong relationship with BP that we want to enhance.

Jon Chappell – Evercore Partners

Okay, so you didn’t even think about putting that back on the trading market?

Ioannis Lazaridis

They wanted the vessels, so we're very happy that they extended.

Jon Chappell – Evercore Partners

Great, okay, thanks Ioannis.

Ioannis Lazaridis

Thank you.

Operator

Thank you. Your next question comes from Justin Yagerman at Deutsche Bank.

Justin Yagerman (Josh) – Deutsche Bank

Hey, good afternoon Ioannis. This is Josh [inaudible].

Ioannis Lazaridis

John, how are you?

Justin Yagerman (Josh) – Deutsche Bank

Good, I guess I want to focus maybe a little bit on the crude tanker exposure. I guess you were painting a bit more of a rosy picture for product in containers. And you still have the three Suezmaxes, two of which are in charter to Capital Maritime. I guess, how do you think about those over the course of the year especially with your sponsor's container ships deliveries this year as well? I mean, should we be expecting maybe some more asset swaps and increased container exposure this year?

Ioannis Lazaridis

There's a number of questions in this one. To start with, over the four Suezmaxes that we have, two are charted with Capital Maritime. The other one is with BP, the Amore Mio. And the Amore Mio II is with PEMEX, so [inaudible]. So two of the vessels which Maritime just fixed in November at $24,000, so we have a few months ahead of us before we can think about the renewal.

Same applies for the BP in the PEMEX vessels that in effect, they expire the first quarter of next year. So these vessels are fixed for a period of time, which effectively doesn’t be concerned about them today. It's a big premature.

The situation with the containers is a different one. We have Capital Maritime. They can deliver us of a number of container vessels. We have mentioned that in our previous conference call three months ago. So that is a different proposition. And as I mentioned, also in the January call, we look at any acquisition that we may make on its merits and the criteria being whether it's a credit on the distributions. So I cannot say more than that.

Justin Yagerman (Josh) – Deutsche Bank

Got it, I guess maybe moving to the product tanker sector. And with some of these ships opening up this year, I guess how do you view profit sharing? I mean we're seeing a lot of decent contracts out there with some solid floors and the ability to get upside above those floors. So is that something you consider? And how do you balance the kind of fixed rate versus profit shared over the next year or two?

Ioannis Lazaridis

I believe that there is good fundamentals in the product tanker market. If you look at the medium range tankers, if you look at the fleet growth in medium range tankers in 2012, that was less than 1%. At the same time, demand was in excess of 3%, 4%. And that is expected to be repeated this year because I think there's going to be a substantial number of non-deliveries again because of the financing situation primarily. So I think that there is good momentum for upward moving the product tanker rates.

When it comes to our unit holders, MOP unit holders like visibility at the distant rates and I think that if you look at the current flows of this profit sharing charters that you will see we still are quite low. We're optimistic that this can improve. And subject to what the floor will be then, we can consider also profit sharing arrangements. Don’t forget that our arrangements with Capital Maritime also have profit sharing if the vessels are used on ice.

Justin Yagerman (Josh) – Deutsche Bank

That's fair enough. And just also on product tankers, I guess you mentioned the massive slippage we saw in 2012. Do you have any sense of how much of that is just maybe order book over statement or just non-existent vessels versus actual owners pushing to delay deliveries?

Ioannis Lazaridis

I think that's a very good question and a very difficult one to answer because it's difficult to know how many of these vessels actually will never be delivered. But given that many of these product tanker outside in Korea, you expect many of the owners to simply not being able to take delivery. And to an extent, delaying or eventually postponing indefinitely these projects. I feel that the financing situation in the world is difficult. And many of these vessels to not get charters that can satisfy the levels of financing that owners would be comfortable with to go ahead with the projects. So I think there is a fair element of financial difficult that makes these projects difficult to come to the market. And I think that the financing market for many owners will remain quite difficult.

Justin Yagerman (Josh) – Deutsche Bank

And just one more before I let you go. There is a slight increase in related party of liabilities. It's at $7 million or so. Is that just timing or should we expect those continued elevated levels?

Ioannis Lazaridis

No, it's just timing. And I think that most of that has been paid back since the end of the quarter.

Justin Yagerman (Josh) – Deutsche Bank

Great, thank you for your time.

Ioannis Lazaridis

Thank you.

Operator

Thank you, your next question comes from Michael Webber at Wells Fargo.

Michael Webber – Wells Fargo

Good morning, Guys, how are you?

Ioannis Lazaridis

Hi, Mike, how are you?

Michael Webber – Wells Fargo

I'm good. You already touched on OSG. And I mean it's been out of the market for a while now, so I don’t think it's going to catch a whole lot of people by surprise. But I do want to kind of go back to Josh's question on the container ships. And I know you gave an answer there kind of the standard answer in terms of what you guys are looking at. But I mean, how would you prioritize container ships I guess against product tankers and crude tankers in terms of incremental growth from here I mean given what's apparent and what you're seeing in the market? I mean is it reasonable to think that container ships are going to be a pretty big avenue for growth for the distribution over the next two to three years?

Ioannis Lazaridis

Potentially yes, but it depends a lot on the merits of which transaction we may look at. There is a number of product tankers that are out there. But the charter rate, which we can fix may be at this level of the unit price are not as lucrative. So as I said, we look at every acquisition on its' merits and whether these acquisitions are accretive to the distribution. So at this point as I said before, we will judge each transaction on its' merits. And given the unit price, it’s not easy to have many active transactions that easily.

Michael Webber – Wells Fargo

That makes sense. Just to follow up on that, is there any limit to what you guys could add just from a qualifying income perspective in terms of container ships? Have you guys had these conversations around that yet?

Ioannis Lazaridis

I think you know that we are in [inaudible], so that does not affect our distribution.

Michael Webber – Wells Fargo

Not at this point, clarification. Around the product anchor market, you mentioned the market firming. But it really seems like the one year rates have moved and the three year rates still look pretty sticky. What do you kind of attribute that narrowing of that spread to? I mean do you think that's a reflection of maybe just a little trepidation in kind of a two to three year market? Or is that just a function of a lack of liquidity in those three year charters?

Ioannis Lazaridis

The majority of these vessels that have been fixed this year were for one year as you point out. And that has led to the one year rate moving up. Simply, owners don’t think that rates are high enough to fix for longer. That's why you see that there hasn’t been that much activity on the three year end. I think as the charters – and you see that they have a better [inaudible] product given the number of features. As charters become more optimistic about the market, they will fix for longer. And I think that the three year rate will get on stack as well.

Michael Webber – Wells Fargo

Got you, all right, that's helpful. One more for me. I'll turn it over. As the tanker markets came in the last couple years, you guys lowered your reserves a bit to support the distribution, which seems pretty prudent. As we're starting to see an uplift in the product tanker market and as you guys are sourcing more growth opportunities kind of from non-traditional sources be it dry bulk or container ships, how do you think about starting to increase the reserves, the replacement reserves for your fleet as the market moves higher? Any balance that I guess potentially down the road increasing your distribution?

Ioannis Lazaridis

We were very pleased that the coverage of the distribution in the fourth quarter was 1.2 times. As we built coverage, we will again revisit our replacement CapEx as well as distribution.

Michael Webber – Wells Fargo

Is there a systemic level you look at from a coverage perspective that you would kind of go back to initially looking might raising your reserves prior to moving the distribution?

Ioannis Lazaridis

It's a lot of things there. We would also like to lengthen the duration of our charters so the market is convinced about the sustainability of any potential increase the distribution.

Michael Webber – Wells Fargo

Okay, thanks for the time.

Ioannis Lazaridis

Thank you.

Operator

Your next question comes from Paul Jacob of Raymond James. Thank you.

Paul Jacob – Raymond James

Hey Ioannis.

Ioannis Lazaridis

Hi, Paul. How are you?

Paul Jacob – Raymond James

Good, how are you doing?

Ioannis Lazaridis

Well, thank you.

Paul Jacob – Raymond James

So the first question that I had, and you know, recognizing the fact that you can’t offer a lot of color on this, I’m still curious. How do you think internally when you’re doing risk assessments and forecasting about the risk associated with OSG? Do you discount those charters or are your forecasting a full run rate?

Ioannis Lazaridis

Look, as I mentioned when I gave you the 3.7 years remaining duration of charters, that’s for the purpose of the discussion, I excluded the OSG. I cannot say much more of how the discussions are going, but any contract with OSG while they’re in bankruptcy, that will be a very strong contract according to the bankruptcy laws. I can’t say much more on that.

Paul Jacob – Raymond James

Okay. And then shifting over to the crude market, so when you think about global capacity and obviously the fact that you have higher production scaling up in the U.S. that’s leading to a surplus across the globe, do you see the situation where possibly we start to use this excess crude tanker capacity for fleet and crude storage? And if so, what do you think the timing on that sort of activity would be?

Ioannis Lazaridis

Crude storage for the past few months has not been very significant. It was back in the beginning of 2012 because of the Iranian situation, but I think what you have seen in – on the back of the improved production in the states is lower VLCC shipments through the years. We have mostly Suezmax now. We have only Suezmax now. The Suezmax fleet is one exposed to the [inaudible] and it’s also taking market share from our Suezmax from the West Africa to U.S. trade. So demand for Suezmax is expected to be a more or less close to the surplus Suezmax. So I think this is a more balanced market and hopefully this market as we have seen late in the fourth quarter will bounce back further.

Paul Jacob – Raymond James

Okay. And then what would be your preference, you know, if you did decide to kind of lever a little bit more away from the crude side of the business towards other bulk or container vessels? I mean, would you prefer increasing your container capacity or would you be more [inaudible]?

Ioannis Lazaridis

Well, the bulk market today offers very few opportunities, especially given where the charter rates are. So I doubt that there’s going to be that much activity in the bulk carrier market. But as I said earlier, I think looking at [inaudible] and acquisition warrants merits whether tanker container or bulk.

Paul Jacob – Raymond James

Okay. And then the last question, more of a housekeeping item I guess. When I look at your interest rates, and obviously you have the swaps coming due this year, how do you think about, you know, potentially fixing those rates and locking them in so you have the assurity of your interest expense going forward?

Ioannis Lazaridis

It’s a good question. I mean, from April 1st all will be floating and currently when we have a record low LIBOR rates, I think that it is an intention by several banks to maintain liquidity in the system. We will look at fixing the rates longer term subject to what we can shop them at. And I have to say that shop rates for 3 to 5 years has dropped quite heavily since. So it may be attractive.

Paul Jacob – Raymond James

Okay. Thanks.

Ioannis Lazaridis

Thank you.

Operator

Thank you. (Operator Instructions). Your next question comes from Ken Hoexter, Bank of America/Merrill Lynch.

Ken Hoexter (Wilson) – Bank of America/Merrill Lynch

Hey, good morning, guys. It’s actually Wilson sitting in for Ken.

Ioannis Lazaridis

Hi, Wilson. How are you?

Ken Hoexter (Wilson) – Bank of America/Merrill Lynch

I’m doing good, Ioannis. I hope you are too. I have a question, I guess, more on the acquisition side. As you’re kind of talking about kind of difficult obtaining ship financing, obviously it relates back to the, I guess, conditions of the European financial institutions. I mean, have you seen anything kind of along the way of kind of banks wanting to offload their portfolios? And if you have, you know, what is your appetite for looking at such type of deals? I know that it hasn’t been that big of a topic but I was just curious to have your take on it.

Ioannis Lazaridis

There are opportunities like that, but they wouldn’t be appropriate for the Partnership, the ones, at least, we have seen to date. We have a strong balance sheet with the 39% net debt to cap and 53, 54% of Partner’s capital pluses. We would probably not go easily into levering it that big again soon. So we think that it’s important to look at the opportunities, but many of the opportunities that have come up from the banks to date, they wouldn’t be with projects that are suitable to the Partnership.

Ken Hoexter (Wilson) – Bank of America/Merrill Lynch

Got it. And more of just thinking about the dropdown side, I mean, could you remind us, you know, are there [inaudible] up at the Capital Maritime that’s, you know, are kind of more in the line of what you’re thinking about and obviously, the vessel classes, you know, product tanker – just a quick update.

Ioannis Lazaridis

Well, Maritime has three deals, the [inaudible] is one, the Suezmax is one product and two small containers, two bulkers and it’s to take the delivery of five container vessels. That’s the profile, but there is many other vessels outside of Capital Maritime, so we’ll look at all of those when it comes to making an acquisition. But as I said earlier, every acquisition has to be judged on the back of how it is on the distributions.

Ken Hoexter (Wilson) – Bank of America/Merrill Lynch

Thank you.

Operator

Thank you. (Operator Instructions). There are no more questions.

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