Seaspan Reports Financial Results

Seaspan Corporation (NYSE: SSW) announced the financial results for the three and nine months ended September 30, 2009.

Third Quarter 2009 and Year-to-Date Highlights:
- Reported revenue of $74.1 million and $207.0 million, respectively, for the three and nine months ended September 30, 2009 compared to $57.6 million and $166.8 million for the comparable prior year periods;

- Paid a second quarter dividend of $0.10 per share, representing an approximate 20 percent payout ratio. The second quarter dividend was paid on August 20, 2009 to all shareholders of record as of August 11, 2009;

- Reported normalized net earnings(1) of $20.2 million, an increase $1.2 million, or 6.5%, for the quarter from $19.0 million for the comparable quarter

- Reported normalized net earnings of $57.5 million, an increase of $1.7 million, or 3.0%, for the nine month period from $55.8 million for the comparable period last year. Normalized net earnings include a $1.1 million charge that was accrued for in the second quarter as a result of exercising the delivery deferral options. This amount is due at the deferred delivery date of each vessel and represents the cost of entering into the delivery deferral options and, therefore, is required to be accrued for in the period under financial reporting standards. The company does not believe it is representative of its operating performance and if excluded, normalized net earnings for nine months would have increased from the comparable prior period by $2.8 million, or 5.0%;

- Reported normalized earnings per share(1) of $0.25, a decrease of $0.04 from $0.29, or 13.8% for the prior year's quarter, and reported decreased normalized earnings per share by $0.16 or 18.0% to $0.73 for the nine month period from $0.89 for the comparable period last year. The overall decrease in normalized earnings per share over the comparable prior year periods is due to additional shares issued in our April 2008 equity offering, the non-cash dividend accrued to the Series A Preferred Shareholders as part of the Series A Preferred Stock issuance in January 2009 and the $1.1 million expense for exercising the delivery deferral options. Excluding the impact of the $1.1 million charge, normalized earnings per share for the nine months ended September 30, 2009, would be $0.75;

- Reported net loss of $66.0 million for the quarter ended September 30, 2009 compared to a net loss of $5.1 million for the comparable quarter last year. Net loss includes unrealized losses of $92.6 million and $24.7 million from interest rate swaps for the current and comparable quarters respectively;

- Reported loss per share of $1.03 for the quarter ended September 30, 2009 compared to a loss per share of $0.08 for the comparable quarter last year. Reported loss per share includes change in fair value losses of $1.37 per share and $0.37 per share from interest rate swaps for the current and comparable quarters respectively;

- Reported net earnings of $70.6 million for the nine months ended September 30, 2009 compared to $42.6 million for the comparable period last year. Net earnings includes unrealized losses of $0.1 million and $7.5 million from interest rate swaps for the current and comparable periods respectively;

- Reported earnings per share of $0.93 for the nine months ended September 30, 2009 compared to $0.68 for the comparable period last year. Reported earnings per share includes change in fair value losses of $0.12 per share from interest rate swaps for the prior period;

- Accepted delivery of two newbuild vessels in the three months ended September 30, 2009: the MOL Eminence and CSCL Manzanillo;

- Exercised options to defer the delivery date for 11 of the vessels that the company has contracted to purchase. The deferrals are for periods ranging from two to 15 months from the dates agreed to under the original shipbuilding contracts. The shipbuilding contracts and time charters have been amended to provide for the new delivery dates;

- Deferred the delivery date for two additional vessels that the company has contracted to purchase. The deferrals are for a period of approximately nine months from the dates that were agreed to under the original shipbuilding contracts. The shipbuilding contracts and time charters have been amended to provide for the new delivery dates;

- Declared a third quarter dividend of $0.10 per share. The third quarter dividend is to be paid on November 19, 2009 to all shareholders of record as of November 9, 2009; and

- Subsequent to September 30, 2009, closed the second and final $100 million tranche of the $200 million aggregate investment in the company's Series A Preferred Stock on October 1, 2009.

Gerry Wang, Chief Executive Officer of Seaspan, stated, "During the third quarter, Seaspan further grew its fleet by taking delivery of two vessels. We have now taken delivery of six container vessels in 2009, all commencing time charters ranging from six to 12 years. With all 41 vessels secured on long-term time charters, Seaspan has once again achieved strong utilization for its fleet. We are pleased to continue to provide leading liner companies, concentrated in Asia, with modern, high specification vessels that meet high performance standards."

Mr. Wang concluded, "With the closing of the second tranche of Seaspan's $200 million preferred share issuance in October, we further improved the company's capital structure and strengthened its financial flexibility. We look forward to taking delivery of 27 remaining newbuildings all under long-term charters, which will position the company to grow its contracted revenue stream. Based on cash retained from operations combined with secured committed financing, we have arranged for nearly all of the capital needed to finance our contracted fleet growth."

Revenue
Revenue increased by 28.6%, or $16.5 million, to $74.1 million for the quarter ended September 30, 2009, from $57.6 million for the comparable quarter last year. Revenue increased by 24.1%, or $40.3 million, to $207.0 million for the nine months ended September 30, 2009, from $166.8 million for the comparable period last year. The increase was primarily due to the delivery of nine additional vessels between October 2008 and September 2009. These deliveries included the CSCL Lima, CSCL Santiago, CSCL San Jose, CSCL Callao, CSAV Loncomilla, MOL Emerald, CSAV Lumaco, MOL Eminence and CSCL Manzanillo. Expressed in vessel operating days, our primary revenue driver, these nine vessels contributed 686 of the 790 additional operating days in the quarter, or $14.6 million in additional revenue.

Operating days increased by 28.0%, or 790 days, to 3,612 days for the quarter ended September 30, 2009 from 2,822 operating days for the comparable quarter last year. Operating days increased by 26.1%, or 2,112 days, to 10,202 days for the nine months ended September 30, 2009 from 8,090 operating days for the comparable period last year. This increase was primarily due to the delivery of nine additional vessels between October 2008 and September 2009 which contributed 1,488 of the additional 2,112 operating days for the nine months ended September 30, 2009, or $29.7 million in additional revenue. During the three months ended September 30, 2009, the CSCL Oceania incurred approximately 14 days of off-hire related to scheduled vessel dry-docking. Vessel utilization was 99.4% and 99.8%, respectively, for the three and nine months ended September 30, 2009 compared to 99.2% and 99.0%, respectively, for the comparable periods in the prior year. Our vessel utilization since our initial public offering is 99.3%.

Ship Operating Expense
Ship operating expense increased by 46.5%, or $6.6 million, to $20.7 million for the quarter ended September 30, 2009, from $14.1 million for the comparable quarter last year. The increase was primarily due to the adjustment of technical services fees for the period commencing January 1, 2009 and the operating expenses associated with the nine vessels delivered since October 2008. Approximately $3.6 million of the $6.6 million increase was due to the re-negotiated technical services fees for the 32 vessels in operation for the quarter ended September 30, 2008 and for the quarter ended September 30, 2009. The fees for these vessels increased by approximately 23% from the initial technical services fees. Approximately $3.6 million of the $6.6 million increase was due to the addition of the nine vessels to our fleet since October 2008. Stated in ownership days (our primary driver for ship operating expense based on fixed daily operating rates) these nine deliveries account for an increase of 688 ownership days for the quarter ended September 30, 2009, as compared to the third quarter of 2008. The increased ship operating expense was partially offset by a $0.6 million decrease in extraordinary(3) costs and expenses not covered by the fixed fee for the three months ended September 30, 2009 compared to the comparable period last year.

Ship operating expense increased by 46.4%, or $18.3 million, to $57.7 million for the nine months ended September 30, 2009, from $39.4 million for the comparable period last year. Approximately $11.7 million of the $18.3 million increase was due to the re-negotiated technical services fees for the period commencing January 1, 2009. The increase was also due to the addition of the nine vessels to our fleet between October 2008 and September 2009. Stated in ownership days (our primary driver for ship operating expense based on fixed daily operating rates) these nine deliveries account for an increase of 1,491 ownership days, or $7.7 million in ship operating expense, for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The increased ship operating expense was partially offset by a $1.1 million decrease in extraordinary(3) costs and expenses not covered by the fixed fee for the nine months ended September 30, 2009 compared to the comparable period last year.

Depreciation
Depreciation expense increased by 25.2%, or $3.6 million, to $18.0 million for the quarter ended September 30, 2009, from $14.4 million for the comparable quarter last year. Depreciation expense increased by 21.2%, or $8.9 million, to $51.0 million for the nine months ended September 30, 2009, from $42.1 million for the comparable period last year. The increase was due to the increase in number of ownership days from the nine deliveries between October 2008 and September 2009.

General and Administrative Expenses
General and administrative expenses decreased by 15.5%, or $0.4 million, to $2.0 million for the quarter ended September 30, 2009, from $2.3 million for the comparable quarter last year. General and administrative expenses decreased by 3.9%, or $0.2 million, to $6.1 million for the nine months ended September 30, 2009, from $6.3 million for the comparable period last year. For the three months ended September 30, 2009 compared with the comparable period in the prior year, general and administrative expenses are lower primarily due to overall cost reduction in the current year. The general and administrative expenses for the nine months ended September 30, 2009 are consistent with the comparable period in the prior year.

Interest Expense
Interest expense decreased by 5.0%, or $0.3 million, to $5.1 million for the quarter ended September 30, 2009, from $5.4 million for the comparable quarter last year. Interest expense decreased by 34.3%, or $8.2 million, to $15.8 million for the nine months ended September 30, 2009, from $24.0 million for the comparable period last year. Interest expense is composed of interest at the variable rate plus margin incurred on debt for operating vessels and a non-cash reclassification of amounts from accumulated other comprehensive income related to previously designated hedging relationships. Although the average operating debt balance was higher for the quarter ended September 30, 2009 compared to the same quarter in the prior year, interest expense decreased due to a decrease in LIBOR. The average LIBOR for the three and nine months ended September 30, 2009 was 0.3% and 0.5%, respectively, compared to 2.5% and 2.8%, respectively, for the comparable periods in the prior year. Although we enter into fixed interest rate swaps, the difference between the variable interest rate and the swapped fixed rate on operating debt is recorded in our change in fair value of financial instruments caption as required by financial reporting standards. The interest incurred on our long-term debt for our vessels under construction is capitalized to the respective vessels under construction.

Change in Fair Value of Financial Instruments
The change in fair value of financial instruments resulted in a loss of $92.6 million for the quarter ended September 30, 2009 compared to a loss of $24.7 million for the comparable quarter last year. The change in fair value of financial instruments resulted in a loss of $0.1 million for the nine months ended September 30, 2009 compared to a loss of $7.5 million for the comparable period last year. The change in fair value loss of $92.6 million for the quarter ended September 30, 2009 is due to decreases in the forward LIBOR curve and overall market changes in credit risk since June 30, 2009. On September 30, 2008, due to the compliance and expense burden associated with applying hedge accounting, we elected to prospectively de-designate all interest rate swaps for which we were applying hedge accounting treatment. As a result, from October 1, 2008, all of our interest rate swap agreements and our swaption agreement are marked to market with all changes in the fair value of these instruments recorded in "Change in fair value of financial instruments" in the Statement of Operations. Prior to de-designation on September 30, 2008, approximately 30% of the change in fair value was recorded in "Accumulated other comprehensive loss" in the equity section of our balance sheet for our designated swaps with the change in fair value of our non-designated swaps recorded in "Change in fair value of financial instruments" in the statement of operations.

Change in fair value of derivative financial instruments is a required accounting adjustment under financial reporting standards. At the end of each reporting period, we must record a mark-to-market adjustment for our interest rate swap agreements and swaption as though the instruments were realized as of the reporting date.

The accounting adjustments appear in the following locations in the financial statements:
1) Other Comprehensive Income - For interest rate swaps that the company had designated as hedges under the technical accounting requirements for hedge accounting, an amount was included in "Other comprehensive income" that approximated the adjustment in fair value. Since we have elected to prospectively de-designate the interest rate swaps for which we applied hedge accounting, no further fair value changes are recorded to "Other comprehensive income". Following the de-designations, the amounts in "Other comprehensive income" will be reclassified to earnings when and where the interest payments are reflected in earnings.

2) Statement of Operations - For interest rate swaps that are not designated as hedges under the accounting requirements for hedge accounting, mark-to-market adjustments and periodic cash interest settlements are recorded in "Change in fair value of financial instruments".

Other expenses
Additional charges of $1.1 million were accrued for in the three months ended June 30, 2009. This amount is due to the shipyards in connection with the 11 options of $0.1 million each that were exercised. These amounts are due at the deferred delivery date of each vessel and are considered to represent the cost of entering into the delivery deferral options in accordance with financial reporting standards and therefore were accrued for.

Cash Available for Distribution(4)
During the three and nine months ended September 30, 2009, we generated $38.6 million and $112.4 million, respectively, of cash available for distribution, as compared to $33.9 million and $99.3 million, respectively, for the comparative periods in 2008. For the three months ended September 30, 2009, this represents an increase of $4.7 million, or 13.8%, as compared to the same quarter in 2008. For the nine months ended September 30, 2009, this represents an increase of $13.1 million, or 13.2%, as compared to the same nine month period in 2008.

We announced on April 28, 2009 that our board of directors decided to reduce our quarterly dividends from $0.475 to $0.10 per share to retain a higher portion of our distributable cash to fund future capital expenditures due to the uncertainties associated with the global recession and the capital markets. Our board of directors cannot determine how long this reduction will be in effect. This reduction will enable us to retain an approximate additional amount of $100 million per year that can be redeployed to fund our newbuilding program. Based on a dividend of $0.475 per quarter, our annualized dividend on the current number of shares outstanding would be approximately $128 million. Based on a dividend of $0.10 per quarter, our annualized dividend on the current number of shares outstanding would be approximately $27 million.

Equity Capital Requirements
As of September 30, 2009, the estimated remaining installments of the 27 vessels that we have contracted to purchase but have not yet been delivered amounted to approximately $1.8 billion. Seaspan has secured long term credit facilities to fund the newbuild vessels and does not have any credit facilities maturing until 2015. To fund the remaining portion of the price of the vessels the company has contracted to purchase, we intend to raise in the range of approximately $180 million to $240 million in common or other equity and or other forms of capital starting in approximately the fourth quarter of 2010 or first quarter of 2011 and ending in approximately second quarter 2012. The current state of the global financial markets and current economic conditions may adversely impact our ability to issue additional equity at prices which will not be dilutive to our existing shareholders or preclude us from issuing equity at all. We continue to actively pursue alternatives which will allow us to defer or eliminate some or all of our current equity needs.

Our credit facilities do not contain traditional vessel market value covenants that require us to repay our facilities solely because the market value of our vessels declined below a certain level. Our $1.3 billion credit facility agreement contains a loan to market value ratio requirement that must be met before we can borrow funds under that facility. Based on a valuation obtained in June of 2009, we are currently unable to borrow the additional $268 million under our $1.3 billion credit facility.

Dividend Declared:
For the quarter ended September 30, 2009, we declared a quarterly dividend of $0.10, representing a total distribution of $6.8 million. The dividend will be paid on November 19, 2009 to all shareholders of record as of November 9, 2009.

Since our initial public offering in August 2005, we have declared cumulative dividends of $6.39 per share. Because we adopted a dividend reinvestment plan, or DRIP, the actual amount of cash dividends paid may be less than the $6.8 million based on shareholder participation in the DRIP. Cumulatively, since we adopted the DRIP in May 2008, an additional 1.1 million shares were issued through the participation in the DRIP. As of today's date and based on a discount of 3%, participating shareholders invested $11.4 million in the DRIP since we adopted the DRIP in May 2008.

(www.seaspancorp.com)