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Ultrapetrol (Bahamas) Ltd. (NASDAQ:ULTR)

Q4 2007 Earnings Call

March 14, 2008 10:00 am ET

Executives

Leonard Hoskinson - CFO

Felipe Menendez - President and CEO

Analysts

Scott Burk - Bear Stearns

Jamie Nicholson - Credit Suisse

Mike Lanier - AIG

David Floren - DCF Capital

Operator

Good morning and welcome to Ultrapetrol’s fourth quarter and full year 2007 earning conference call. (Operator Instructions) Now I’d like to turn the meeting over to Mr. Hoskinson, Chief Financial Officer. Sir you may begin.

Leonard Hoskinson

Good morning everybody. Thank you for joining us. Earlier this morning we issued a press release announcing our financial results for the fourth quarter and full year 2007. In that press release you will see a reference to a replay of this call which will be available for one week via telephone starting approximately one hour after this call ends.

To recap for those numbers how the replay can be accessed are 1-800-294-0991 for those calling toll free United States or area code 1402-220-9753 for those outside of United States. Each with a pass code ULTR. This webcast will be archived on Ultrapetrol's website for 7 days after this call.

With me today is Felipe Menendez, Ultrapetrol's President and Chief Executive Officer. Felipe will review Ultrapetrol's business segments as well as discuss our industry and future growth opportunities. I’ll take you through the financials and after our remarks we will be happy to take your questions.

Before we begin, however, we would like to draw your attention to the language contained in our previously filed reports and prospects concerning forward-looking statements.

This conference call may include assumptions, expectations, projections, and intentions and believes about future events. These statements may constitute forward-looking statement. We caution that assumptions, expectations, projections, intentions and believes of our future events may vary from actual results and the differences can be material.

Forward-looking statements include future as future operating or financial results, statement of our plans, pending or recent acquisitions is the strategy and expect a capital spending or operating expenses including dry docking.

Please read the company registration statements on Form F1, annual reports on Form 20-F and reports on Form 6-K filed with the United States Securities and Exchange Commission for the important factors that could effect our results for out forward-looking statement mentioned.

With that said, I am now going to hand the call over to Felipe.

Felipe Menendez

Thank you, Len and good morning everyone. Thank you for joining us on the call today. As we discussed in our press release the adjusted EBITDA net income for the 2007 year was $76.7 million and $19.4 million respectively. For the fourth quarter, our adjusted EBITDA net income were $19.1 million and $3.4 million respectively.

While Len would discuss the financials in more detail later on the quarter, I would like to note that our full year revenues and EBITDA are the highest that the company has reported in its history.

During 2007 we implemented substantially all the strategic initiatives that we highlighted to our investors at the commencement of the year. These initiatives are designed to significantly increase our fleet size and efficiency across our core business segments in the future. I would like to briefly discuss our achievements in 2007 as well as mention where we have made significant investments in this past year and what we can reasonably expect from our business segments in the future.

In our River business, we increased volumes carried by 16% for the year despite a net increase of less than 7% in our fleet capacity during 2007. While we had given the market guidance to expect an increase in the total EBITDA of our River business for the full year of 2007 of 10% above the 2006 figure, we achieved virtually the same EBITDA, $18.2 million that we generated in 2006.

Our fourth quarter results were affected by the unusually low water conditions that prevailed in the High Paraguay river, which prevented us from navigating and consequently from carrying cargoes including iron ore, over this section of the river in the last three months of the year.

As announced, we redeploy a significant portion of our fleet to load in other areas of the river not affected by the low water conditions. But the time lag and more significantly the additional expenses and fuel incurred for this redeployment resulted in EBITDA for the fourth quarter of 2007, which was $1 million below the fourth quarter of 2006 instead of $0.8 million above as we had originally expected

We have experienced in 2007 an increase in our running costs and voyage expenses associated with the larger volume transported, and higher fuel costs, but also significantly due to the devaluation of the local currencies against the US dollar.

This has increased our unit costs for the same level of activity and while we can expect to see this trend in respective of the value to the US dollar continue during the 2008. We are taking steps to try to reduces its overall effect both by increasing when possible contractually the tariffs that we charge for various services and mitigating the incremental costs through efficiency gains.

I’m pleased to report that the River levels have returned to normal in the first quarter of 2008. The outlook for the 2008 year and beyond in our river business is indeed quite strong.

As we discussed in our past calls we have signed long term contracts for the carriage of incremental quantities of iron ore. Starting in the second half of 2007, these contracts escalate significantly in volume for 2008, and again mostly decisively to over 1 million tons per year for 2009 onwards. In addition there are options currently in place that could increase the additional volume under the converted 2 million tons per year.

While 2007 saw a record soybean crop in the region. The USDA estimates of Paraguay which is center to our River system indicate an increase of further 0.8 million tons or 11.5% for 2008. The current unprecedented international price for soybeans fueled by diminishing US production which results from larger areas devoted to corn creates a significant incentive for farmers to rapidly expand the seeded area.

To meet this incremental future demand, maintaining a satisfactory return in the investment and improving our overall margins, we’ve begun the implementation of the three previously announced programs in 2007.

Firstly, we’ve begun the construction of our new shipyard, which we expect to be in production by the end of 2008 and which will be the most modern of its kind in South America.

With our new automated state-of-the-art shipyard we want to build barges cost effectively at a significant lower unit cost on the alternative while importing them from the USA. That has been the main source of equipment for us so far.

We will start taking delivery of the new equipment for the yard, during the second quarter of 2008 and we’ve already contracted the erection of the buildings. We are also on plan with the construction of the additional services required for the operation of the yard.

Secondly, we approached to the ship to South America, 30 barges and one push boat that will arrive in the second quarter of 2008. We intend to make a second similar shipment immediately after. Simultaneously we’ve continued our barge enlargement program, which increases the efficiency of our existing barges and both together these initiatives will increase our capacity in the river to meet the incremental 2008 demand until our new yard is in production.

Thirdly, we’ve taken delivery of the first two new heavy fuel engines, out of a total of 24 engines ordered so far which we are over the next three years, we aim of substituting a large proportion of our diesel consuming engines by more powerful heavy fuel ones’ and reduce our fuel expense increasing our margins considerably.

In our offshore business during 2007 we took delivery of our fifth PSV which began its operations in May, and we ordered the construction of four sister vessels in India and two larger units in China with delivery scheduled to start in the middle of 2009.

At present, two of our vessels operate in Brazil, and three operate in the North Sea.

Following the positioning of our UP Topazio in the North Sea in the fourth quarter of 2007, the positioning costs as we anticipated in our previous call would have an adverse effect on our fourth quarter results. We expect, however, that this vessel’s operations in the North Sea will have a positive effect on our 2008 earnings, particularly beginning in the second quarter when that market strengthens seasonally.

As we previously announced, three of our five ships are employed on the long-term contracts extending from March to May 2009, while the fourth vessel remains in employed till August 2008 and the remaining ship operates on shorter-term charters.

We expect to receive our sixth vessel from the yard in Brazil by the end of 2008, which at this time remains uncommitted for employment.

The outlook for the Platform Supply Vessel market remains quite strong. A large number of rigs are on the construction, which we believe will generate a demand for PSVs and in particular, to large very modern technologically-advanced units such as the ones we own and have an order. Coupled with the current robust oil prices, we believe the right incentives are in place for expansion of the offshore exploration and production on a large scale.

The very large deepwater new discoveries at Tupi field in Brazil provide visibility into the potential for offshore demand over the next few years. We believe that with our modern fleet and our presence both in the North Sea and Brazilian markets, we are well positioned to capture this growth in the future. The revaluation of the Brazilian real against the US dollar is again a reason for some concern on the expense side as we move forward into 2008. We have limited our exposure to the variational real to only two of our four ships. And we may get partial recognition of this effect in our current employment contracts for those two vessels.

However, the contractual adjustments if applicable occur once a year in the reais, so there maybe a temporary misalignment with the increases on expenses that we may experience every month.

In our ocean business during 2007, we commenced service with three additional vessels, Alejandrina, a [handy] product carrier vessel that started service in South America in March; Amadeo, 39,000 ton deadweight tanker that started service under the three-year contract at the end of August; and our Capesize, Princess Marisol, which only commenced service in mid-November. In 2007, we also sold our Princess Marina which was the oldest of our ocean tankers.

Before moving on, I would now like to talk about an important change in our ocean business. As you will recall from our previous discussions two of our three largest existing vessels the OBO’s Princess Nadia and Princess Susana were employed throughout 2007 on long-term time charter at daily rates that averaged slightly below $27,000 per day per vessel. Our third OBO, Princess Katherine was partially employed on an existing charter for some time in 2007 and some [sequentially] fixed for various employments during the year, which were offset by the actual cash losses incurred on the freight forward agreements that were sold for the same 2007 maturity.

The combined result of the average time chartered at this vessel and in the market during the year and those cash losses that were actually incurred for the FFA positions that settled during the same period, means that the vessel earned a net time chartered during 2007 of approximately $31,000 per day.

As we have discussed these old time charters that yielded lower results expired in early 2008. Importantly, the earnings of these three vessels have been secured for 2008 through freight future agreements, FFAs, at a level that we believe will result in an EBITDA generated by these three vessels, approximately $25 million higher than what these same three ships generated in 2007.

This additional contribution is being calculated assuming earnings equivalent to the current market levels for the FFAs for the remaining free days in 2008 and assuming that the vessels operate during the entire calendar year.

In addition in 2008, we have the contribution of a fourth Capesize vessel of this size which will bring further additional EBITDA contributions through our Oceans segment. We have explained in the press release that we made in connection with filing our 20-F that our 2007 year-end results and in particular the results of our Ocean segment should be adjusted for a $11.7 million effect of the non-cash losses generated by the mark-to-market of our FFA positions, which mature between the 1st of January and the 31st of March 2008. And consequently do not correspond to 2007.

As we go forward in the second quarter of 2008, unless the accounting criteria changes, as a result of a misalignment between the employment of our ships and the hedges used to cover them, we should not have this non-cash mark-to-market effect in our profit and loss statement any longer. Since the balance of our FFA positions register their variances against other comprehensive income.

We have also announced in our press release that at current market levels we expect to show in our accounting result for the first quarter of 2008 a positive variance of our FFA positions of approximately $6 million as a function of several factors including a partial buy back of our FFA positions that produced a better result in the settlement of the FFAs in the period.

We expected that our product tankers will continue to be profitably employed in South America and we continue to plan to increase this fleet in the future. In our passenger business, we operated two ships during the first ten months of 2007. As previously announced, we sold the New Flamenco in November. The results of our remaining ship, the Blue Monarch which operated in 2007 for the first time in a weekly service in the Aegean, were affected by lower than anticipated number of passengers coupled with higher fuel costs in operating expenses.

For the 2008 season various agreements were reached with tour operators that we expect will result in a significant increase in occupancy levels. Also fuel surcharges were imposed in order to cover increases in the fuel prices and the structuring of the crew has been planned to reduce our operating costs.

I will now hand it over to Len who will run us through the financial highlights for 2007.

Leonard Hoskinson

Thanks, Felipe. At this point I will discuss the highlights for the full year and the fourth quarter of 2007 results. Total revenues for the company in 2007 were $221.7 million compared to a $173.5 million in 2006. Full year 2007 net income was $4.4 million compared to $10.5 million in 2006.

The 2007 results included the net gain of $10.1 million from the sales of the Princess Marina and New Flamenco and also include an $11.7 million non-cash mark-to-market net loss on FFA hedges and $3.3 million being a deferred income tax charge from unrealized currency exchange gains on dollar denominated debt of our Brazilian subsidiary. Basic net income per share in 2007 was $0.14 compared to $0.59 in 2006.

Adjusted net income for 2007 excluding the non cash mark-to-market loss on FFA hedges and the deferred income tax charge on unrealized exchange gains was $19.4 million or $0.62 per share compared to $13.2 million or $0.73 per share in 2006. We are reporting consolidated EBITDA for 2007 or $65 million that compares with the 2006 of $62.4 million.

Adjusted EBITDA for 2007 excluding the non-cash mark-to-market net loss on FFA hedges was $76.7 million for the full year compared to $62.4 million for the same period of 2006. Our River business EBITDA in 2007 was $18.3 million as compared to $18.5 million in 2006. As Felipe explained, the main contributing factor for not having, experienced a comparative growth was the low water levels of the High Paraguay River in the fourth quarter 2007.

Volumes transported during 2007 was 16% to 17% higher when compare to 2006.

Revenues for our River Business have been $24.3 million in the fourth quarter of 2007, compared to $19.8 million in the same period of 2006. Revenues for the full year 2007 of our River Business were $93.9 million compared with $79.1 million in 2006. This increment in revenues is reflective of the larger volumes and an increase in pricing which includes an additional $2 million for revenues for other services.

Similarly, our voyage expenses have increased to $42.7 million in 2007, from $33.5 million in 2006. This variance is attributable to the higher fuel price, larger quantities of fuel consumed and mainly due to the exceptionally high voyage expenses incurred during the fourth quarter of 2007 because of the low water conditions in the High Paraguay River that Felipe mentioned.

Our running costs for the River business in 2007 came to $26.1 million compared to $20.6 million in the same period of 2006. The difference of $5.6 million is mainly associated with increases in crew costs, the addition of two new push boats and 45 barges during the year and the large number of operating boat days associated with a larger volume and the low water levels experienced in the fourth quarter of 2007.

We also experienced an increase in running costs [as a function] of the devaluation of the US dollar against local currencies.

Our offshore supply business EBITDA in 2007 was $19.2 million compared to $13.7 million in the same period of 2006. During 2007, we started the year with four PSVs and took delivery of a fifth vessel, the UP Diamante in May 2007. At the beginning of 2006, we only had two PSVs in operation and we added the third vessel the UP Agua-Marinha and the UP Topazio in September finalizing the year with four vessels. We remind you that we only consolidate the Offshore Supply segment as from the second quarter of 2006.

EBITDA in the fourth quarter of 2007 was $3.4 million compared to $4.5 million in the same period of 2006. The fourth quarter of 2007 was impacted by the positioning of the UP Topazio from Brazil to the North Sea, as well as by the allocation of our yearly overheads for the full year 2007.

Running costs for our offshore supply fleet during the fourth quarter 2007 were $4.4 million compared to a $2.6 million in the same period in 2006. The increase in running costs is mostly due to additional vessel, the UP Diamante, which is in operation in Brazil since May and partially to the cost increases experienced in Brazil due to the 17% revaluation of the Brazilian currency between December 31, 2006 and December 31, 2007.

During the fourth quarter 2007, the repositioning of the UP Topazio increased our running costs during the period, what we expected to affect positively our results by diminishing our Brazilian running costs.

Ocean business EBITDA in 2007 was $23.9 million including the non-cash mark-to-market loss of FFA hedges compared of $20.8 million for the same period in 2006. Excluding the non-cash mark-to-market loss in FFA hedges, adjusted EBITDA in 2007 has been $35.7 million, compared to $20.8 million for the same period in 2006.

Two product carriers, Alejandrina and Amadeo were added to the service during 2007 in March and August respectively, and we took delivery of a Capesize Vessel, the Princess Marisol, which started its service in November 20, 2007.

Our Aframax tanker, Princess Marina was sold and delivered to new owners in October 2007, and a gain on the sale of this vessel is included in our Ocean Business segment EBITDA for 2007.

Lastly [to explain], the old long-term charters under which two of our older vessels were employed, for an average net time charter rate of about $27,000 per day during the whole of 2007 and the net effect of the market earnings obtained by our Princess Katherine in 2007 combined with the cash losses of FFA positions, which matured in 2007, resulted in a yearly average time charter for the Princess Katherine of approximately $31,000 a day.

These low-earning time charters, which prevailed in 2007, affected negatively our ocean EBITDA for the year and particularly the fourth quarter, since significant parts of the FFA cash losses occurred in that period. As explained, with the sole exception of Princess Susana, this time charter expires in April 2008, these charters have come to an end and all our OBO and Capesize vessels are presently operating at substantially higher levels.

Our passenger business EBITDA for 2007 was $700,000 as compared to $8.7 million for 2006. During the fourth quarter 2007, we have a negative EBITDA of $2.3 million compared with the positive $1.9 million in the fourth quarter of 2006. New Flamenco was sold in November 2007 and the loss on the sales is also affecting our EBITDA for the period.

Results of the New Flamenco operation were quite satisfactory. However, the first GNC season for the Blue Monarch was more challenging and initially anticipated as Felipe has already outlined.

Finally our total tax cost for 2007 was $4.7 million, of which $3.3 million correspond to deferred income tax charges from unrealized currency exchange rate gains on US dollar denominated debts of our Brazilian subsidiary, compared with $2.2 million in 2006.

And with that I’ll hand the call back to Felipe.

Felipe Menendez

Thank you, Len. Well we want to thank you all for joining us today in the call and giving us the opportunity of sharing with you some comments on our fourth quarter and full year 2007 performance. We will now be very happy to take our questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Scott Burk, Bear Stearns. Your line is open.

Scott Burk - Bear Stearns

Hi, good morning guys.

Felipe Menendez

Good morning, Scott.

Scott Burk - Bear Stearns

Hey just wanted to try to separate out what happened in the fourth quarter that may not be going forward in terms of the expenses. Can you guys just talk about maybe just gross G&A expenses going forward and what kind of level we should look to for that? And I'll come back for another question as well?

Leonard Hoskinson

Yeah, sure. Scott, looking back on our previous guidance on G&A, I think in the previous call you had pointed out to us that your calculated running G&A expense was about $5.1 million per quarter. I think that running rate is not inappropriate. It reflects what our average for 2007 has been and we are not expecting any significant increases in G&A from any of our four business segments during the course of the year.

Scott Burk - Bear Stearns

Even with the addition of the new barges in the river segment and the new Capesize vessel?

Leonard Hoskinson

Not substantially. No. I think one of the factors that is affecting our G&A at the moment is the devaluation of the US dollar against various currencies. And of course we will experience some increases coming from that sector. But we think we have taken measures to mitigate that increase in cost. So, I think the 2007 figure is a good indication of what our running overhead expenses should be.

Scott Burk - Bear Stearns

Okay. And can you talk about any hire time that you incurred for the first quarter and any thing you expect to occur specifically within the ocean shipping vessels or PSVs?

Leonard Hoskinson

Yes we have had a hire time on one of our PSVs and on one of our [handy bulk] tankers operating in South America. Both of these will be substantially compensated by our loss of hire insurance. So you should not expect to see a big deviation coming from that sector. We have not repositioned any units or taken other commercial decisions that would run to them off higher not compensated by insurance during the period.

Scott Burk - Bear Stearns

Could you tell you what the Topazio is earning right now and you said you expect higher in the second quarter but with what’s Topazio earning did it earn for the first quarter?

Leonard Hoskinson

Topazio, well, first quarter you know is a bit abnormal in the sense that January is a low month. The overall names of Topazio for the first quarter should be in the region of $18,000 to $19,000 a day we believe but we still have to see a few days after the first quarter to average that.

Scott Burk - Bear Stearns

And then one last question on the Rivers expenses --

Leonard Hoskinson

Just to complete that answer, at the moment current earnings are about 16,000 pounds; so that’s $32,000 with of course January was much slower. So if we want to take an average for the first quarter, I think that’s an appropriate average.

Scott Burk - Bear Stearns

You are going to keep that on the spot market for the full year?

Leonard Hoskinson

Yeah well indirectly, we have replaced her for another ship under a contract but then the other ship is going to become available in the spot market. So the effect is same, yes.

Scott Burk - Bear Stearns

Okay and then the River expense, you talked about exceptionally high voyage expense for the River for the third quarter and the fourth quarter, $11.5 million in third, $12.9 in the fourth quarter. What is that going forward, when the River levels get back to normal, are we going to see that kind of go back down to the levels we saw back in the second quarter or is 11, 12, kind of the run rate we should see on voyage expenses in the River.

Leonard Hoskinson

I think we will see in 2008 an increase in voyage expenses associated again with the revaluation of the local currencies against the US dollar and also as a function of general increases across our smaller port push boats that we hire from third parties. These smaller companies which we hire these tuck boats from are experiencing the same kind of increase in running cost that we are experiencing directly to the revaluation of the local currencies as well. So, I think they are going to be somewhat higher if you want to put an average to it, I would say somewhere between the average of the second and third quarter.

Scott Burk - Bear Stearns

Okay, so not higher than the fourth quarter, higher than the average for the year you are saying.

Leonard Hoskinson

Yes, absolutely. The fourth quarter was abnormally high on a per ton basis, both in running cost and voyage expenses because basically we were redeploying vessels in the parts of the river which were not affected by these low water conditions and then. You spend more fuel, you spend more operating hours on the push boats and you are not carrying cargo.

Scott Burk - Bear Stearns

Okay, and then that’s not going to be impacted or boosted by the fact you are repositioning those two fleets. You mentioned one you have already purchased is going to reposition down, and then one from the US, you mentioned you are potentially going to buy another (inaudible) it sounds like. What are those going to do to expenses?

Leonard Hoskinson

No, nothing, because effectively we capitalized the cost of carrying these barges from the United States to our River system in the valley of the barge positioned in South America. So, effectively you’ll see that the cost of the barge is amortized over time.

Scott Burk - Bear Stearns

And one final question and I’ll get out of the way. On the revenue side for the barge segment, are you going to have any price increases this year or are there just going to be the pricing, essentially the slight price increase you got when you did at the end of next contract? Anything beyond that?

Leonard Hoskinson

As we have previously discussed, the pricing system in the river is such that most of our contracts roll over in a three to five year basis. Some of them are up for the renewal this year, some increases can be expected from that side. We have also increased the pricing on auxiliary services that are included in our freights in some cases transshipment, in some cases trucking, and where the contracts gives us flexibility to do that, we have added that to the pricing. So, we believe that coupled with the cost cutting strategies that we have implemented for 2008, we should not see further deterioration of the relation of running costs and voyage costs per ton.

We are, of course, covered for fuel increases by the adjustments in our contract prices. Again there maybe some temporary misalignments because our cargo-carrying contracts are just once a month and our purchases are just once a week. So, in periods of quickly escalating oil prices as we have seen in the first quarter, you may have a moderate impact of the fact that your fuel will run faster than your adjustment but then there is a catchup effect in the following quarter.

So, effectively, fuel should not represent the problem in 2008, and the cost side of our running costs and voyage expenses should not suffer further deterioration than what we have just discussed.

Scott Burk - Bear Stearns

Okay, thanks.

Operator

Jamie Nicholson, Credit Suisse, your line is open.

Jamie Nicholson - Credit Suisse

Hi, thanks so much for the call. Can you give us a break down of your CapEx plans for 2008? I know you purchased some barges and planned to purchase some additional ones in the second quarter. Can you break out your CapEx by amount you expect to stand for barges, for the PSVs, shipyard and then if you're planning any more purchases or sales of ocean vessels or passenger vessels? Thanks.

Leonard Hoskinson

Hello Jamie. We have detailed contractual tabular disclosure in our 20-F, which details all our CapEx's going forward and we have discussed in the appropriate section of the 20-F as well the immediate financings that we've put in place to cover that. Essentially, just to run over them pretty quickly, we have ordered six ships for our offshore company and four of them in India and two in China. The four Indian ships will require approximately $22.6 million per vessel and investments in the two Chinese vessels approximately 26. And that is why we do not declare the optional two ships under the Chinese contract.

In our River division, we have purchased two shipments of barges and push boats in 2008. The first one is already underway. The total capital expenditure of these shipments in the past has been approximately 13 million per shipment. And we are building the new shipyard in Argentina to build barges, which as we previously disclosed, is a capital expenditure in around $25 million.

In addition to that, we have a barge enlargement program and we will start buying the materials to start our production at the end of the year with the new yard. We have purchased 24 engines for our re-engining program. That will be over a three-year period, as we have previously announced a $46 million to $50 million CapEx all the way up to 2010.

In our Ocean segment, we have planned, we have possession of at least two more product carriers in the next two years, and we intend to probably expand that as we go along further in time but at least two are planned for the next two years. We do not have any CapEx plan at the moment in connection with our passenger vessels, and I think the overall look up of the CapEx’s that we have are focused, basically in river and offshore with a view that what we invest in these two sectors is going to yield an EBITDA beyond 2009. We won't be seeing the effect of the re-engining program until well in 2010.

Jamie Nicholson - Credit Suisse

Okay. I’m sorry I didn’t see that table in the 20-F. So what do you expect your total CapEx for 2008 to be and do you expect additional debt financing required this year?

Leonard Hoskinson

I think that you will see in that table in the 20-F that the 2008-2009 CapEx's combined amount to something like $250 million. As we've previously discussed, we do not expect to meet substantial amounts of additional indebtedness in 2008 and 2009 with approximately $50 million to $60 million of loans and as we go along we could cover the entire CapEx program all the way to year 2010.

Jamie Nicholson - Credit Suisse

Okay. So over two years it’s $250 million, but given your expected increase in EBITDA you don’t expect additional borrowings more than in the range of 50 to 60 in any one year. Is that correct?

Leonard Hoskinson

Not in any one year, in total.

Jamie Nicholson - Credit Suisse

In total, okay. And Just one final question, I know S&P put you on positive outlook at the end of January and I am just wondering what your discussions have been with Moody's and if S&P has any specific leverage targets or our cash flow targets to consider an upgrade of your bonds. Thanks. Any update you can give us on your rating agency discussions would be great? Thank you.

Leonard Hoskinson

We have not had any discussions with Moody’s, only Standard & Poor's has approached us to do a revision and they reviewed off course our CapEx plans going forward as we have disclosed them and the cash flow is to be expected from our current fleet in 2008 and 2009. So, I suppose they took that into consideration in upgrading our credit.

Jamie Nicholson - Credit Suisse

Okay. Thanks so much for the color.

Felipe Menendez

You are welcome.

Operator

Mike Lanier, AIG. Your line is open.

Mike Lanier - AIG

Well most of the ground has been covered in the earlier questions but you talked about 50 to 60 and new debt to handle the CapEx in the next couple of years. Is it fair to say that that’s 50 to 60 in total net debt or you will be building cash in addition to taking those loans down?

Leonard Hoskinson

Very good question, sorry I forgot to clarify that. No that is new debt but it takes into consideration the fact that we have a motorization of debt in the next two years in an amount of approximately $17.8 million of principle repayments in 2008 and $19.5 million in 2009 and almost $17.5 million in 2010. So the $50 million to $60 million takes in to consideration that we will have to repay these amounts of debt over the next three years.

Mike Lanier - AIG

So you don’t get confused, let say it is 50 in 2008 and new loans, you put on 50 but you will simultaneously being paying down 17, so it will be more in the middle?

Leonard Hoskinson

That is correct. We will be taking an additional $50 million of new loans but we will be amortizing in 2008 $17 million to $18 million.

Mike Lanier - AIG

I guess why you ended the year here with about 64 in cash, do you plan keeping that level or are you going to use some of it?

Leonard Hoskinson

Well we are going to use some of it to of course cover our CapEx program which is fairly large over the next two years.

Mike Lanier - AIG

And what’s your operating cash level, what’s it, 25 or 30 is what you just really need to run the business?

Felipe Menendez

Well we have a line of credit of 10 and we usually keep sort of cushion of $14 million to $15 million for cash flow variations and with that line of 10 and that cushion we will comfortably be able to manage the business.

Mike Lanier - AIG

Is the CapEx plan that I haven't seen at eight years that you laid out does that contemplate the progress payments that you make on these boats? And then as far as when they are actually delivered have you already lined up the permanent financing?

Leonard Hoskinson

Yes. Actually the CapEx plan contemplates all the progress payments that we will have to make and the payments that we will have to make on delivery. And with the exception of a total financing package -- additional financing package, as I said $50 million to 60 million, we can manage the rest from our own cash flows as they look right now. So, if you want a better indication of the CapEx program in some detail, there is one on-file in our website at a presentation that we did for Jefferies last year. It's of course a variable. It’s a moving target and you may expect that CapEx to vary, but it's a good indicator of where are we going to be spending the moneys in each of our divisions going forward.

Mike Lanier - AIG

Okay, great. And then the last question I guess would be that as I read through the press release, you are pretty optimistic on the crops and the iron ore and the offshore in Brazil if current plan anticipating those things happening or if they actually come in as strong as you suggest they could be, will you -- might you accelerate, expand the plan?

Felipe Menendez

We might. As we were discussing a few moments ago, we have these two optional vessels that we have to declare in China. So, that is one expansion that may take place. Basically as you got rightly pointed out, demand is going to be very strong as we see it in 2008. In our offshore fleet of our five current ships, three are spoken for in terms of earnings throughout 2008. And we expect the other two, one of which is in the charter till August and the other one which is three years from the end of this quarter, to be earning higher levels. And if the market strengthens further, we could see some more earnings coming from those two ships, but other than that the offshore fleet is committed.

On the ocean fleet, we have committed through FFAs, the earnings of three of our four large vessels. As we explained during this call, we expect those three vessels to earn $25 million more in EBITDA than they did in 2007. So you can take out 2007 Ocean's segment and add $25 million because these three vessels have come out of these old charters and are now going to be earning this much higher FFA levels that we have secured.

The fourth vessel is open in the market and again the market from this year for Capesize vessels on the ocean side is quite strong at the moment. So, you can expect that vessel to produce quite significant additional EBITDAs because she was not there during most of 2007. We only bought her on the 20th of November of 2007. The rest of our ocean fleet, the product tankers are on longer term charters. So, you should not expect to see variations in that area.

In our River Business, I think you heard us explain that the demand for 2008 is quite strong. We are adding capacity while we are building the new shipyard, which will be in production we hope at the end of the year, and we have substantial volumes committed so the fleet in terms of demand is already spoken for 2008. And we should see those volumes and rates yield a better result than in 2008 and during 2007. But you shouldn't expect some spectacular increase basically because our capacity is only increasing 6% or 7% this year. And the real increases in margins and in volumes will kick in 2009 and 2010 as our new yards starts producing barges and we change the consumption of our engines from diesel to fuel.

So, effectively in the river, we are expecting a better year, but really the serious increases in revenues and EBITDAs should occur in 2009 and '10.

Mike Lanier - AIG

Very good. Thank you.

Felipe Menendez

You’re welcome.

Operator

Scott Burk, Bear Stearns, your line is open.

Scott Burk - Bear Stearns

Hi. It's me again. Just wanted to ask a follow-up on the Passenger segment, what kind of EBITDA would you expect for this year? I think you had mentioned some challenging issues in terms of getting the vessel contracted out.

Felipe Menendez

That's right. In 2007, we had this vessel operating its first season in the Aegean, Scott. And as with any new service, the breaking in and getting the number of passengers was challenging perhaps a bit more challenging than we had imagined. But in 2008, I think these agreements that we've signed with tour operators would give us the occupancy levels that we’re looking for. We have not given guidance for 2008 on the EBITDA margins, but I don't think they're going to be very different than the projections that people made two or three years ago when we started the operation of the Blue Monarch and we were expecting occupancy levels in the order of 75%.

So, with that in mind, I think you can project the earnings of this ship safely as what they were historically in 2006 and perhaps a better result if we have a good year, if that is of help.

Scott Burk - Bear Stearns

Okay. And I think that's it. Thanks.

Operator

David Floren, DCF Capital, your line is open.

David Floren - DCF Capital

Hi guys, can you hear me?

Felipe Menendez

We can hear you just fine.

David Floren - DCF Capital

Fantastic. I just had a quick question regarding the OBOs and the Capesize Katherine, all are operating on spot right now?

Felipe Menendez

No, not yet. We have the Susana -- Princess Susana still committed on one of these old charters until April, and that comes to an end. Other than that the ships are operating on market levels, yes.

David Floren - DCF Capital

But, all right. So, can you give us a sense for the spot rates that the OBOs are currently receiving?

Felipe Menendez

Well I can tell you this. The average of the four time charter routes in the index is about $135,000 today. Our ships traditionally discount from the typical index vessel, which is a bit larger and deadweight and more economical in consumption somewhere between 22% and 25%. So, if you take the daily index of the four routes and you discounts between 22% and 25%, you are not too far off the mark.

David Floren - DCF Capital

Is that going to be same for the older Capesize, not the Marisol?

Felipe Menendez

That is correct. That [is same] to all four ships, yes.

David Floren - DCF Capital

So is it a good match with the FFAs? The FFA, the average route that you are using for your hedges is based on a cape new building right?

Felipe Menendez

It’s based on -- yeah a modern ship. This is where I say, you discount approximately 32% to 35% from that rate and the earnings of our vessels.

David Floren - DCF Capital

All right. All right, thank you. That’s it.

Felipe Menendez

Thanks.

Operator

At this time, I’d like to turn the call back over to Felipe Menendez. Sir?

Felipe Menendez

Thanks to everybody for participating in the call and we expect to be able to be able to release our first quarter figures within the 45-day period after the close and we will be talking to you then. Thank you very much again and have a good day.

Operator

This does conclude today’s conference. You may disconnect at this time. Again thank you for your participation.

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