K-Sea Transportation Partners L.P. F3Q10 (Qtr End 03/31/10 Earnings Call Transcript

Executives

Jim Dowling - Chairman

Tim Casey - President and CEO

Terrence Gill - CFO

Analysts

Todd Fowler - KeyBanc Capital

Darren Horowitz -Raymond James

Erwin Levy - Henry Corp

Ron Londe - Wells Fargo

Selman Akyol - Stifel Nicolaus

K-Sea Transportation Partners L.P. (KSP) F3Q10 (Qtr End 03/31/10 Earnings Call April 29, 2010 9:00 AM ET

Operator

Welcome to the fiscal third second quarter 2010 K-Sea Transportation Partners earnings call. My name is Solomon and I will be your event manager today. (Operator Instructions)

Now I would like to hand the conference over to your, Terrence Gill, Chief Financial Officer. Please proceed sir.

Terrence Gill

Good morning everyone and welcome to the K-Sea Transportation Partners third quarter fiscal 2010 investors and analysts call. Our Chairman, Jim Dowling, and our President and CEO, Tim Casey will join me today. Following a few comments by Tim and me, we will be available for questions.

As always, I must first remind you that this presentation contains forward-looking statements, which include any statements that are not historical facts and that these statements involve risks and uncertainties as detailed in our filings with the Securities and Exchange Commission that we suggest you read. If one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.

Now, on to the fiscal 2010 third quarter results. Earnings before interest, taxes, depreciation and amortization or EBITDA was $9.1 million, for the quarter ended March 31, 2010 a $13.3 million decrease as compared to $22.4 million for the third fiscal quarter of 2009.

Seasonal demand for our services is always lowest during our third fiscal quarter due to the slowdown in the Alaskan and Great Lakes markets. EBITDA for the third quarter of fiscal 2010 was impacted negatively by a $16.9 decrease in net voyage revenue, resulting from 1182 fewer working days as compared to the prior year's third quarter.

As a reminder, we announced last fall we would be retiring our single-hull vessels and the decrease in single-hull working days accounted for 604 or more than half of the total decrease in days. As of today, we are down to only five single-hull vessels from 18 a year ago with any significant employment.

The net utilization on the remaining fleet decreased mainly attributable to sixteen fewer long-term time charters and plays as compared to the prior year’s third quarter. This amounted to approximately one million barrels of capacity or 25% of our fleet.

These vessels that can off charter were employed in a weak spot market and experienced reduced rates and far lower utilization. As market conditions continue to struggle and vessel availability within the industry remains ample, our customers are not seeking to commit to long-term charters at this time.

Net utilization for the quarter was also negatively impacted by an extensive number of drydocking days in which we lost 320 days due to shipyard, a 127 more days than the third fiscal quarter of 2009. More than 85% of these shipyard days took place in our larger coastwise vessels.

We expect to see a significant decrease in drydocking days in the fiscal 2010 fourth quarter and in line with the amount of days as compared to the prior year’s fourth fiscal quarter.

The average daily rate for the fiscal 2010 third quarter, which reflected the positive impact of our new build 185,000 barrel, ATB and the exclusion of recently retired single-hulls was 11,259 relatively flat from last quarter.

Our vessel operating expenses for the fiscal 2010 third quarter was lower than the fiscal 2009 third quarter by $3.4 million. This decrease occurred despite an additional $1.3 million in lease expense incurred from five sale-lease back transactions completed in June 2009.

We also experienced a general and administrative expense of $0.8 million as compared to the prior year's second quarter. Although there is some seasonality our quarterly general and administrative expenses peaked at $8 million in the September 30, 2008 quarter.

Fiscal 2010 third quarter, general and administrative expenses of $6.7 million are 16% below our peak level. The company continues its committed effort to reduce overall cost.

I’ll now turn the presentation over to our President and CEO, Tim Casey.

Tim Casey

Thank you, Terry, and good morning, everyone. In the second half of fiscal 2008 the slowing economies start to impact the slope of our long-term growth trajectory. However, with over 80% of our fleet on term contracts averaging 2.5 years we felt the company would be relatively insulated from the slow down and our growth path would [preserve]. Unfortunately we were wrong, for K-Sea’s business economic weakness in the energy market continued through o calendar 2009. Particularly in the last four months of the year and through the first calendar quarter of this year. For us the recession was very deep and prolonged and the decline in 2008 and 2009 wiped out about 10% of US petroleum demand or about 2 million barrels a day.

Across the board, petroleum refiner's margins came under severe pressure owing to the high price of crude oil and the inability to raise refined product prices efficiently to offset the price of crude. To ease their profit squeeze the refiners cut utilization and actually shut some capacity both temporarily and permanently.

Refinery utilization is a simple proxy to gauge both the health of the refining industry as well as refined petroleum product demand. If you look at utilization in the 20 years from 1990 to mid-2009 it vacillated between 84% and 94%. If we use a four-week moving average, the view is similar, but if we focus on the second half of 2009 through February this year we get a completely different picture.

In the third calendar quarter of last year, our first fiscal quarter, refinery utilization averaged 84.6%., but late September utilization started to drop and from October on it fell like a stone through mid-to-late February this year, ultimately dropping below 78%.; a level unseen in 20 year, except for hurricane periods.

For the first time in my 20-year involvement with K-Sea and its predecessor companies, customers reneged on verbal commitments to rollover evergreen contracts and/or entered new agreements and did not exercise options on current contracts. We had to extend some contracts at lower rates something we have not done in 10 years.

In the process, the company's barge utilization fell as more units were free of contracts and went into the spot market. At the high of the winter heating season this past February, the weather was extremely cold in the north east; we still could not keep our fleet fully employed, a condition not seen in 15 years.

To give you a sense of the correlation our vessel utilization bottomed in February as did refinery utilization with the month of March higher than our average utilization for the quarter. There is no question we were surprised and greatly disappointed at the turn of events over the past six months. So we are hopeful that the worst is behind us.

One, on macro-basis refinery utilization has ticked up off the bottom and has been running at 84% to 85% in the recent weeks and most energy experts are pointing towards a gradual recovery over the next three years. Similarly, our utilization is up a bit as well.

Two, on a micro-basis there are company specific items that should be positives. Most of which have been mentioned before but they still bear repeating. The normal, seasonal, upturn in our June, September, December quarters and the positive contribution from two newly constructed and chartered out units.

We are dealing with the current realities of the market specifically we have had some success employing vessels in alternative markets. For example our ethanol volumes are up noticeably.

Second, although the worst, in absolute terms, although modest in absolute terms at approximately $5 million, we have agreements to sell eight single-hull barges and a tug boat, with four transactions closing in April and five set for the month of May. In aggregate we expect to lose less than a $1 million on these sales with some units sold at gains and some at losses.

So we are required to recognize losses when we know them. So we recorded an impairment charge of $1.7 million in the March quarter, which we recorded in the depreciation and amortization account. We will record a $900,000 gain in the June quarter.

Lastly, as Terry mentioned we continue to emphasize cost controls where our G&A costs are running about 16% below the peak reached in September of 2008. We are continuing to stress cost reductions and we are constantly looking for additional ways to streamline our operations.

I’d like to review for you some numbers on our industry. In 2006, the aggregate fleet of Jones Act tank vessels involved in refined products and related markets totaled about 37 million barrels. This included tank barges and tankers of all size. The same year according to the international energy administrations, liquid fuel consumption was just under 21 million barrels a day. In 2009, average fleet had risen to 38.9 million barrels but the year-end fleet fell to 35.7 million barrels, down 6.7% from year-end 2006.

In 2009, consumption felt to 18.7 million barrels a day or down about 10% from the 2006- 2007 levels. So there was a clear miss-match of supply and demand. However, within the 35.7 million barrels there were 4.9 million barrels of single-hull capacity with active load lines that is they were classified as being qualified to operate according to the US Coast Guards and American Bureau of Shipping. As we have stated several times in the past we believe single-hull vessels are effectively obsolete, as there is sufficient double-hull capacity to satisfy demand.

So let's take a look at the future, and particularly the end of 2011. If we eliminate all the single-hull vessels and add additional deliveries of double-hulled vessels in 2010 and 2011, the UN 2011 fleet will be about $33.9 million barrels. While this amount will be some 10% lower than that, which existed in 2005 and 2006, the currently fleet is certainly more efficient. So we assume affective capacity would be about average with the 2005, 2006 numbers.

We recognized forecasting energy demand has been very difficult task in the last two years, but nevertheless we believe, it is not a stretch to say that demand in 2010-2012, could return to 2006 levels, when our business was very strong. This analysis also applies to all segments of the market.

Let's take barges of a 150,000 drills and under, for example there were 18.8 million barrels of total industry capacity at the end of 2007, and this is projected to fall to 16.1 million barrels at the end of 2011, when all the single-hulls are fully retired and the remaining new buildings are delivered.

In summary, we believe all these factors should enable supply and demand to come into balance in about a year. With the March quarter behind us, we believe the company will be back on the road to recovery albeit slow at first. In the meanwhile we will follow up aggressively on any and all opportunities.

Jim, Carrey and I would be happy to answer any of your questions now.

Question-and-Answer Session

Operator

(Operators Instructions) Your first question comes from the line of Todd Fowler with KeyBanc Capital.