Business Context and Reporting Period
Company: Capital Product Partners L.P. (Nasdaq: CPLP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2009
Business Overview: An international owner of modern double-hull tankers, including 15 MR tankers, two small product tankers, and one Suezmax crude oil tanker. The fleet is primarily under medium to long-term charters.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Revenues | $31.2 million | $32.0 million | $63.6 million | $59.3 million |
| Net Income (Partnership) | $8.0 million | $12.9 million | $16.8 million | $20.9 million |
| Net Income Per Unit | $0.32 | $0.51 | $0.66 | $0.87 |
| Operating Surplus (Non-GAAP) | $11.5 million | $15.7 million | N/A | N/A |
| Operating Expenses | $16.0 million | $13.7 million | N/A | N/A |
| Interest Expense | $7.5 million | $5.9 million | $15.4 million | $11.5 million |
| Long-Term Debt | $474.0 million | N/A | N/A | N/A |
| Partners' Equity | $164.1 million | N/A | N/A | N/A |
| Cash & Equivalents | $2.0 million | N/A | N/A | N/A |
| Undrawn Debt Facilities | $246.0 million | N/A | N/A | N/A |
Material Changes vs. Prior Period
- Profitability Decline: Net income per unit dropped to $0.32 from $0.51 in Q2 2008. This decrease is attributed to the absence of profit-sharing revenues ($4.5 million in Q2 2008 vs. $0 in Q2 2009) and higher interest expenses.
- Revenue Composition: Total revenues decreased slightly to $31.2 million from $32.0 million. The decline in profit-sharing revenue was offset by stable charter revenues.
- Expense Increases: Total operating expenses rose to $16.0 million from $13.7 million, driven by increased management fees ($8.0 million paid to sponsor Capital Maritime) and higher depreciation ($7.0 million). Interest expense increased to $7.5 million due to higher debt levels and increased bank funding costs.
- Liquidity Position: Cash and cash equivalents decreased significantly from $43.1 million at year-end 2008 to $2.0 million as of June 30, 2009, largely due to vessel acquisitions and distributions.
Guidance, Outlook, and Management Commentary
- Market Conditions: Management describes the tanker spot market as the "most depressed of the last ten years" with weak oil product demand in OECD regions. Expectations for substantial improvement in crude and product spot markets remain low.
- Charter Coverage: The fleet's charter coverage stands at approximately 100% for 2009 and 67% for 2010. Management has no capital commitments to purchase or build new vessels.
- Debt Covenant Amendment: Due to market deterioration, the Partnership amended loan agreements effective until June 2012. Lenders agreed to increase the fleet loan-to-value covenant from 72.5% to 80% and amend vessel valuation methods. In exchange, interest margins increased to 135-145 basis points over LIBOR (previously 75-110 bps).
- Distributions: A cash distribution of $0.41 per unit was declared for Q2 2009, payable August 14, 2009.
- Risks: Risks include the continuing weakness in the spot market, potential vessel deliveries in 2009, weak global oil demand forecasts (IEA -2.9%), and the impact of vessels coming up for rechartering in a depressed market.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the impact of the increased loan-to-value covenant (80%) and higher interest margins on future cash flows and solvency.
- Charter Expirations: Review the specific terms and timing of the 33% of the fleet (2010 coverage gap) that is not currently under long-term charter.
- Liquidity Runway: Assess the sufficiency of the $246 million undrawn debt facility given the low cash balance ($2.0 million) and ongoing distribution obligations.
- Related Party Transactions: Confirm the terms of the $8.0 million management fee paid to Capital Maritime and the vessel swap transactions (Agamemnon II/Ayrton II for Assos/Atrotos).
- Profit Sharing Volatility: Evaluate the sensitivity of future earnings to the return of profit-sharing revenues, which were absent in the current quarter.