California Petroleum Transport 10-Q 2008 Q3 Quarterly report

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

Or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 033-79220

California Petroleum Transport Corporation

(Exact name of registrant as specified in its charter)

Delaware	04-3232976
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Suite 3218, One International Place, Boston, Massachusetts		02110-2624
(Address of principal executive offices)		(Zip Code)
(617) 951-7690
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes  [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer”) in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [__]                                                        ��    Accelerated filer [__]

Non-accelerated filer [X]                                                                Smaller Reporting Company [__]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

     [   ] Yes                      [ X] No

Number of shares outstanding of each class of Registrant's Common Stock as of October 15, 2008

1,000 shares Common Stock, $1.00 par value per share

California Petroleum Transport Corporation

Quarterly Report on Form 10-Q

Nine month period ended September 30, 2008

		PAGE
Part I	Financial Information
Item 1	Financial Statements
	Unaudited Balance Sheets as of September 30, 2008 and December 31, 2007	2
	Unaudited Statements of Operations and Retained Earnings for the three and nine month periods ended September 30, 2008 and 2007	3
	Unaudited Statements of Cash Flows for the nine month periods ended September 30, 2008 and 2007	4
	Notes to the unaudited Financial Statements	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3	Quantitative and Qualitative Disclosures about Market Risk	9
Item 4T	Controls and Procedures	10
Part II	Other Information
Item 1	Legal Proceedings	10
Item 1A	Risk Factors	10
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3	Defaults Upon Senior Securities	10
Item 4	Submission of Matters to a Vote of Security Holders	10
Item 5	Other Information	10
Item 6	Exhibits	10
Signatures		11

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this document may constitute forward-looking statements.  The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

California Petroleum Transport Corporation (the “Company”) desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation.  This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance.  The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project," "plan," "potential," "will," "may," "should"  and similar expressions identify forward-looking statements.

The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties.  Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.

In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies and currencies, general market conditions, including fluctuations in charterhire rates and vessel values, changes in demand in the tanker market, including changes in demand resulting from changes in OPEC's petroleum production levels and world wide oil consumption and storage, changes in the Company's operating expenses, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, and other important factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission.

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ITEM 1 – FINANCIAL STATEMENTS

California Petroleum Transport Corporation

Balance Sheets as at September 30, 2008 and December 31, 2007

 (Unaudited)

(in thousands of US$)

	September 30, 2008		December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		1		1
Current portion of term loans receivable		9,970		9,526
Interest receivable		3,323		1,864
Other current assets		97		70
Total current assets		13,391		11,461
Term loans receivable, less current portion		67,463		77,367
Deferred charges		576		642
Total assets		81,430		89,470
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accrued interest		3,323		1,864
Current portion of term mortgage notes		9,970		9,526
Other current liabilities		97		70
Total current liabilities		13,390		11,460
Term mortgage notes, less current portion		68,039		78,009
Total liabilities		81,429		89,469
Stockholder’s equity
Common stock, $1 par value; 1,000 shares authorized, issued and outstanding		1		1
Total liabilities and stockholder’s equity		81,430		89,470

See notes to the unaudited financial statements.

2

California Petroleum Transport Corporation

Statements of Operations and Retained Earnings for the three and nine month periods ended September 30, 2008 and 2007

 (Unaudited)

(in thousands of US$)

	Three month period ended September 30,						Nine month period  ended September 30,
	2008			2007			2008			2007
Revenue
Interest income		1,684			1,886			5,254			5,892
Expenses reimbursed		8			20			26			36
Net operating revenues		1,693			1,906			5,280			5,928
Expenses
General and administrative expenses		(8	)		(20	)		(26	)		(36	)
Amortization of debt issue costs		(22	)		(22	)		(66	)		(66	)
Interest expense		(1,662	)		(1,864	)		(5,188	)		(5,826	)
		(1,693	)		(1,906	)		(5,280	)		(5,928	)
Net income		-			-			-			-
Retained earnings, beginning of period		-			-			-			-
Retained earnings, end of period		-			-			-			-

See notes to the unaudited financial statements.

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California Petroleum Transport Corporation

Statements of Cash Flows for the nine month periods ended September 30, 2008 and 2007

(Unaudited)

(in thousands of US$)

	Nine month period ended September 30,
	2008			2007
Net income		-			-
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred debt issue costs		66			66
Amortization of issue discount on loan receivable		(66	)		(66	)
Changes in operating assets and liabilities:
Interest receivable		1,459			1,631
Other current assets		27			(25	)
Accrued interest		(1,459	)		(1,631	)
Other current liabilities		(27	)		(25	)
Net cash provided by operating activities		-			-
Cash flows from investing activities
Collections on loans receivable		9,970			10,942
Net cash provided by investing activities		9,970			10,942
Cash flows from financing activities
Repayments of mortgage notes		(9,970	)		(10,942	)
Net cash used in financing activities		(9,970	)		(10,942	)
Net change in cash and cash equivalents		-			-
Cash and cash equivalents at beginning of period		1			1
Cash and cash equivalents at end of period		1			1

Supplemental disclosure of cash flow information
Interest paid	3,729	4,195
Interest received	3,795	3,962

See notes to the unaudited financial statements.

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California Petroleum Transport Corporation

Notes to the unaudited financial statements

1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

California Petroleum Transport Corporation (the “Company”), which is incorporated in Delaware, is a special purpose corporation that was organised solely for the purpose of issuing, as agent on behalf of CalPetro Tankers (Bahamas I) Limited, CalPetro Tankers (Bahamas II) Limited, CalPetro Tankers (Bahamas III) Limited and CalPetro Tankers (IOM) Limited (each an "Owner" and, together the "Owners"), serial mortgage notes and the term mortgage notes (together, “the Notes”) as full recourse obligations of the Company and loaning the proceeds of the sale of the Notes to the Owners by means of serial loans (“Serial Loans”) and term loans (“Term Loans”), to facilitate the funding of the acquisition of four vessels (the “Vessels”) from Chevron Transport Corporation ("Chevron").

The Owners have chartered three of the Vessels to Chevron until 2015 under bareboat charters that are expected to provide sufficient payments to cover the Owners’ obligations to the Company. Chevron can terminate a charter at specified dates prior to the expiration of the charter, provided that it gives the Owner the requisite notice.

On April 21, 2005, pursuant to Clause 2 (a) (ii) of the bareboat charter dated April 5, 1995 between CalPetro Tankers (Bahamas III) Limited (Bahamas III) and Chevron, the Owner received irrevocable notice from Chevron regarding the termination of the bareboat charter of the vessel Virgo Voyager, a single hulled vessel on April 1, 2006. Under the terms of the bareboat charter between Chevron and Bahamas III, Chevron paid a termination fee of $5,050,000. As manager to CalPetro Tankers (Bahamas III), Frontline Ltd (“Frontline”) was obligated to find an acceptable replacement charter as defined by the indenture governing the issue of the Notes that were issued on behalf of the Bahamas III and three affiliated companies. Pursuant to a bareboat charter agreement between CalPetro Tankers (Bahamas III) and Front Voyager Inc, a wholly owned subsidiary of Frontline, Front Voyager Inc agreed to charter the Virgo Voyager as of April 1, 2006 for an initial two year period (the “Initial Period”) with a further seven annual optional periods. The charterhire payable for the Initial Period was $5,050,000 which was prepaid in full on March 31, 2006. The Initial Period expired on March 31, 2008 and Front Voyager Inc exercised the option to extend the charter for an additional year on April 1, 2008 for the amount $1.5 million paid in advance.

The Virgo Voyager is a single hull vessel. The United States, the European Union and the International Maritime Organisation, or the IMO, have all imposed limits or prohibitions on the use of these types of tankers in specified markets after certain target dates which range from 2010 to 2015. In December 2003, the Marine Environmental Protection Committee of the IMO adopted a proposed amendment to the International Convention for the Prevention of Pollution from Ships to accelerate the phase out of single hull tankers from 2015 to 2010 unless the relevant flag states extend the date to 2015. Management does not know whether the non-double hull vessel will be subject to this accelerated phase-out, but this change could result in the Vessel being unable to trade in many markets after 2010. Moreover, the IMO may still adopt regulations in the future that could adversely affect the useful life of the non-double hull vessel as well as the Owner’s ability to generate income which will affect the Owner’s ability to service its debt to the Company.

The Company’s only source of funds with respect to the Notes is the payment of the principal and interest on the loans by the Owners.  The Company does not have any other source of capital for payment of the Notes. The Owners’ only sources of funds with respect to its obligation to the Company are the payments by Chevron and Frontline, including termination payments and investment income. The Owners do not have any other source of capital for payment of the loans.

The interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements are unaudited and should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2007. The Company follows the same accounting policies in the preparation of interim reports. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial condition, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.

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California Petroleum Transport Corporation

Notes to the unaudited financial statements

2.   PRINCIPAL ACCOUNTING POLICIES

(a)                 Revenue and expense recognition

Interest receivable on Term Loans is accrued on a daily basis.  Interest payable on the Notes is accrued on a daily basis.  The Owners reimburse the Company for general and administrative expenses incurred on their behalf.

(b)                 Deferred charges

Deferred charges represent the capitalization of debt issue costs.  These costs are amortized over the term of the Notes to which they relate.

(c)                 Use of estimates

The preparation of financial statements in accordance with US GAAP requires the Company to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities on the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

3.   TERM LOANS RECEIVABLE

The principal balances of the Term Loans earn interest at a rate of 8.52% per annum and are being repaid over a ten-year period which began on April 1, 2006.  The loans are reported net of the related discounts, which are amortized over the term of the loans.

4.   TERM LOANS COLLATERAL

The Term Loans are collateralized by first preferred mortgages on the Vessels to the Company.  The earnings and insurance relating to the Vessels subject to the charters with Chevron have been collaterally assigned pursuant to an assignment of earnings and insurance to the Company, which in turn has assigned such assignment of earnings and insurance to JP Morgan Trust Company, National Association (formerly the Chemical Trust Company of California) as the collateral trustee (the “Trustee”).  The charters with Chevron and the Chevron Guarantees (where the obligations of Chevron are guaranteed by Chevron Corporation) relating to the Vessels have been collaterally assigned pursuant to the assignment of initial charter and assignment of initial charter guarantee to the Company, which in turn has assigned such assignments to the collateral trustee.  The Capital stock of each of the Owners has been pledged to the Company pursuant to stock pledge agreements which have also been collaterally assigned to the Trustee.

The Virgo Voyager was bareboat chartered to Front Voyager Inc. as of April 1, 2006 upon its redelivery from Chevron by virtue of a bareboat charter dated March 31, 2006 by and between CalPetro Tankers (Bahamas III) and Front Voyager Inc. (the “Front Voyager Charter”).  The earnings and insurance relating to the Front Voyager Charter have been collaterally assigned pursuant to an assignment of earnings and insurance to the Company, which in turn have assigned such assignment of earnings and insurance to the Trustee.  The Front Voyager Charter has been collaterally assigned pursuant to an assignment of charter to the Company, which in turn has assigned such assignment to the Trustee.

5.   DEFERRED CHARGES

Deferred charges represent the capitalization of debt issue costs.  These costs are amortized over the term of the Notes to which they relate on a straight line basis. The deferred charges are comprised of the following amounts:

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California Petroleum Transport Corporation

Notes to the unaudited financial statements

(in thousands of $)	September 30, 2008			December 31, 2007
Debt arrangement fees		3,400			3,400
Accumulated amortization		(2,824	)		(2,758	)
		576			642

6.   DEBT

(in thousands of $)	September 30, 2008			December 31,  2007
8.52% Term Mortgage Notes due 2015		78,009			87,535
Less: short-term portion		(9,970	)		(9,526	)
		68,039			78,009

The outstanding debt as of September 30, 2008 is repayable as follows:

(in thousands of $)
Year ending December 31,
2009	9,970
2010	10,256
2011	10,316
2012	10,376
2013 and later	37,091
Total debt	78,009

The term mortgage notes bear interest at a rate of 8.52% per annum with principal being repayable in accordance with a remaining sinking fund schedule which began on April 1, 2006 and interest being payable semi-annually. The term mortgage notes include certain covenants such as restrictions on the payment of dividends and the making additional loans or advances to affiliates.  As of September 30, 2008, the Company was in compliance with these covenants.

As of September 30, 2008, the effective interest rate for the term mortgage notes was 8.52%.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Nine months ended September 30, 2008 compared with the nine months ended September 30, 2007

Amounts included in the following discussion are derived from our unaudited interim financial statements for the nine months ended September 30, 2008 and 2007.

Interest income

(in thousands of $)	Three months ended September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Interest income		1,684		1,886		5,254		5,892

Interest income has decreased in the nine months ended September 30, 2008 compared to the same period in 2007 primarily due to a decrease in the principal balance of loans receivable. On April 1, 2008, the Owners repaid a total principal amount of $9.5 million on the Loans.

Interest income has decreased in the three months ended September 30, 2008 compared to the same period in 2007 as a result of loan repayments during the year. The decrease is in line with expectations.

Administrative expenses

(in thousands of $)	Three months ended September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Administrative expenses		9		20		26		36

Administrative expenses have decreased in the nine months ended September 30, 2008 compared to the same period in 2007 as a result as a result of higher than anticipated audit fees relating to 2006 being settled during 2007.

Administrative expenses have decreased in the three months ended September 30, 2008 compared to the same period in 2007 as a result of the settlement of higher audit fees as explained in the paragraph above.

Interest expense

(in thousands of $)	Three months ended September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Interest expense		1,662		1,864		5,188		5,826

Interest expense has decreased in the nine months ended September 30, 2008 compared to the same period in 2007 primarily due to a decrease in the principal balance of loans payable. On April 1, 2008, we repaid a total principal amount of $9.5 million on the Loans.

The fall in interest expense for the three months ended September 30, 2008 compared to the same period in 2007 is in line with expectations resulting from the interest being charged on a lower principal balance.

8

Expenses reimbursed

(in thousands of $)	Three months ended    September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Expenses reimbursed		9		20		26		36

General and administrative expenses reimbursed comprise audit fees and other costs incurred by us are billed to the Owners. Refer to the discussion above on administrative expenses.

Liquidity and Capital Resources

The Company is a passive entity, and its activities are limited to collecting cash from the Owners and making repayments on the Notes.  The Company has no source of liquidity and no capital resources other than the cash receipts attributable to the Loans.

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a material current effect or that are reasonably likely to have a material future effect on its financial condition, revenues or expenses, liquidity, capital expenditures or capital reserves.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies and estimates from the information provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2007 Form 10-K.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None of the instruments issued by us are for trading purposes.  We are exposed to business risk inherent in the international tanker market as outlined in Risk Factors in our 2007 Form 10-K.

Quantitative information about the instruments as at September 30, 2008 is as follows:

Term Loans

The principal balances of the Term Loans made to the Owners earn interest at a rate of 8.52% per annum and are to be repaid over a remaining ten-year period beginning April 1, 2006. The loans are reported net of the related discounts, which are amortised over the term of the loans.

The table below provides the final principal payments on the term loans if none of the Charters is terminated and if all of the Charters are terminated on the earliest remaining termination dates. The information in the column for No initial charters terminated takes into consideration the effect of the termination of the bareboat charter between CalPetro Tankers (Bahamas III) and Chevron, which was terminated with effect from April 1, 2006.

Scheduled payment date	No initial charters terminated $’000	All Initial charters terminated $’000
April 1, 2009	9,970	9,970
April 1, 2010	10,256	8,671
April 1, 2011	10,316	7,204
April 1, 2012	10,376	5,650
April 1, 2013	10,456	6,140
April 1, 2014	10,536	6,670
April 1, 2015	16,099	33,704
	78,009	78,009

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ITEM 4T – CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s President and Treasurer, with the participation of the Company’s manager, Frontline Ltd, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2008.  Based on that evaluation, the Company’s President and Treasurer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2008.

(b) Changes in Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurances as to the reliability of financial reporting and the accuracy and adequacy of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.

The Company's management including the Company’s President and Treasurer, with the participation of the Company’s manager, Frontline Ltd,   has conducted an assessment of the effectiveness of the Company’s internal control over financial reporting and has determined that the Company’s internal control over financial reporting as of September 30, 2008 is effective.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

None

Item 1A.    Risk Factors

Since December 31, 2007 there have been no material changes in the risk factors as discussed in “Risk Factors” and elsewhere in our Form 10-K that was filed with the SEC on March 31, 2008.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.    Defaults Upon Senior Securities

None

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders in the quarter ended September 30, 2008.

Item 5.    Other Information

None

Item 6 – Exhibits

Exhibit 31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
Exhibit 31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
Exhibit 32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			California Petroleum Transport Corporation
			(Registrant)
Date	October 17, 2008	By	/s/ Nancy I. DePasquale
			Nancy I. DePasquale
			Director and President
Date	October 17, 2008	By	/s/ R. Douglas Donaldson
			R. Douglas Donaldson
			Treasurer and Principal Financial Officer

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