Business context and reporting period
This is Capital Product Partners L.P.’s Form 20-F annual report for the fiscal year ended December 31, 2017, filed March 5, 2018—not a quarterly filing. The company owns and charters tanker, container and drybulk vessels. Its 36-vessel fleet at year-end had an average age of about 8.4 years; 33 vessels were under time or bareboat charters, with a revenue-weighted average remaining charter term of about 5.3 years. The filing identifies the registrant as Capital Product Partners L.P.; it does not identify it as Capital Clean Energy Carriers Corp.
Financial and operating results
Amounts below are in U.S. dollars; financial figures are approximate millions unless otherwise noted.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $249.1 | $241.6 | +3.1% |
| Operating income | $64.3 | $75.7 | -15.0% |
| Operating margin | 25.8% | 31.3% | -5.5 percentage points |
| Net income | $38.5 | $52.5 | -26.7% |
| Net income attributable to common unitholders | $26.9 | $40.6 | -33.8% |
| Basic and diluted earnings per common unit | $0.22 | $0.34 | -35.3% |
| Cash from operating activities | $127.0 | $155.1 | -18.1% |
| Cash used in investing activities | $(2.0) | $(91.8) | Lower vessel-acquisition spending |
| Cash used in financing activities | $(168.3) | $(46.8) | Higher debt repayment and refinancing outflows |
Revenue growth reflected more vessel operating days and fewer off-hire days, partly offset by weaker tanker charter rates. Costs rose: vessel operating expenses were $86.1 million versus $77.5 million, and voyage expenses were $15.2 million versus $10.3 million. Interest and finance costs increased to $26.6 million from $24.3 million; the average loan rate rose to 4.29% from 3.73%. Net margin was approximately 15.4%, compared with 21.7% in 2016.
At year-end, total assets were $1.466 billion, partners’ capital was $933.4 million, and gross borrowings were $475.8 million, down from $605.0 million in 2016. Cash and cash equivalents were $63.3 million and restricted cash was $18.0 million; there were no undrawn credit-facility amounts. Management said working capital should be sufficient for existing liquidity needs for at least 12 months, subject to market developments. The company reported compliance with its debt covenants at December 31, 2017.
Material changes versus the prior comparable period
- Net income declined by $14.0 million despite higher revenue, principally reflecting weaker tanker-market earnings, higher operating and voyage expenses, higher interest costs and a $3.3 million impairment charge.
- The company refinanced most of its external debt in October 2017: it drew $460 million under a new secured facility and, together with $102.2 million of cash, repaid $562.2 million of prior debt. The new facility bears interest at LIBOR plus 3.25% and matures in 2023, with a substantial $143 million Tranche A balloon payment due at maturity.
- Cash distributions declared per common unit were $0.32 for 2017 versus $0.46 for 2016. The fourth-quarter 2017 common distribution was $0.08 per unit; Class B holders received $0.21375 per unit for the quarter, payable ahead of common distributions.
- Common units outstanding increased to 127.2 million from 122.1 million, including 5.2 million units sold through the at-the-market program for net proceeds of $17.8 million before offering expenses.
- The company agreed to sell the M/T Aristotelis for $29.4 million and recorded a $3.3 million impairment. Delivery was expected in March 2018.
Outlook, risks, contingencies and unusual items
Management reported that tanker markets were weak in 2017, with high oil inventories and increased vessel supply pressuring rates; it expected these conditions to continue at least in the near term. Twenty charters were expected to expire in the following 12 months, including 18 tanker charters, versus 12 expirations in 2017. Management highlighted the risk that expiring vessels may be re-chartered at lower rates or remain idle. It also described modest container-market recovery and some drybulk-market improvement, while noting that charter rates remained below historical averages in parts of those markets. The filing provides no specific earnings or distribution forecast.
- Charterer and market concentration: Petrobras, Capital Maritime, HMM and CMA CGM generated 19%, 18%, 18% and 17% of 2017 revenue, respectively. HMM’s five container charters remain at reduced rates through December 2019 following its restructuring; the filing discusses financial and performance risks for HMM and other major charterers.
- Debt, rates and asset values: Debt is largely floating-rate LIBOR debt, with no interest-rate swaps outstanding. Management estimated that a 100-basis-point LIBOR increase would add about $5.8 million to annual interest expense at the 2017 debt level. Falling vessel values could pressure collateral and financial covenants.
- Distributions and capital needs: Class B distributions are cumulative and senior to common distributions. The board has paid common distributions below the partnership agreement’s stated minimum since 2016 and has retained cash for liquidity and debt service. The company estimated about $20 million of ballast-water-treatment capital spending for remaining vessels during 2019–2023; five vessels were scheduled for drydocking in 2018.
- Related parties and governance: Capital Maritime is both sponsor and a significant charterer, and its affiliate manages the fleet. The filing describes potential conflicts, limited unitholder voting rights and modified fiduciary duties. A January 2018 acquisition of the M/T Aristaios from Capital Maritime for $52.5 million and a conditional agreement to acquire the M/T Anikitos for about $31.5 million are post-year-end developments.
- Regulatory and legal matters: A subsidiary pleaded guilty in December 2017 to an oil-record-book violation involving the M/T Amoureux, paid a $700,000 fine and received three years’ probation, with an environmental compliance plan required. The filing also describes 2017 Iran and Sudan port calls and related revenues, stating that the company believed the activity complied with applicable sanctions. The global 0.5% marine-fuel sulphur cap was scheduled to take effect in 2020; compliance costs and vessel retrofits may be material.
- Other exposures: Risks include volatile charter rates and vessel values, customer default, shipping overcapacity, environmental incidents, piracy, insurance limitations, regulatory changes, access to financing and the potential reputational effects of proceedings involving the sponsor’s chairman. The filing reports no material off-balance-sheet arrangements and no other legal proceedings in which the Partnership was then a party.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether upcoming charter expirations—especially the 18 tanker renewals—can be replaced at rates sufficient to support cash flow and distributions.
- Charterer credit quality and exposure to Petrobras, Capital Maritime, HMM and CMA CGM, including HMM’s reduced-rate period and restored-rate terms.
- Debt amortization, the 2023 balloon payment, floating-rate exposure, covenant headroom and the availability of refinancing.
- The sustainability of the $0.08 quarterly common distribution given Class B priority, debt service, retained reserves and capital spending needs.
- Completion and proceeds of the Aristotelis sale, the terms and funding of the Anikitos acquisition, and performance of the post-year-end Aristaios acquisition.
- Actual compliance spending for ballast-water and sulphur rules, drydockings, and any subsequent developments concerning the Amoureux settlement or sanctions-related activity.