Business Context and Reporting Period
Company: Capital Product Partners L.P. (Note: The input metadata referenced "Capital Clean Energy Carriers Corp.", but the filing text identifies the registrant as Capital Product Partners L.P., a master limited partnership organized under the laws of the Republic of The Marshall Islands).
Reporting Period: Fiscal year ended December 31, 2010.
Business Overview: The Company is an international owner of product tankers. As of December 31, 2010, the fleet consisted of 21 double-hull, high-specification tankers with an average age of approximately 4.6 years. The Company generates revenue primarily through medium-to-long-term time charters and bareboat charters, with 19 of 21 vessels under such contracts as of January 31, 2011. Capital Maritime & Trading Corp. owns a 31.2% interest in the partnership and provides management services through its subsidiary, Capital Ship Management Corp.
Key Financial Metrics
| Metric (in thousands, except per unit) | 2010 | 2009 |
|---|---|---|
| Total Revenues | $124,592 | $134,519 |
| Operating Income | $51,318 | $63,931 |
| Net Income | $18,919 | $32,716 |
| Partnership Net Income | $17,936 | $29,225 |
| Net Income per Common Unit (Basic/Diluted) | $0.54 | $1.15 |
| Dividends Declared per Unit | $1.09 | $2.27 |
| Net Cash Provided by Operating Activities | $50,051 | $72,562 |
| Net Cash Used in Investing Activities | $(79,202) | $(55,770) |
| Net Cash Provided by Financing Activities | $58,070 | $(56,389) |
| Total Assets | $758,252 | $760,928 |
| Total Debt (Long-term) | $474,000 | $474,000 |
| Undrawn Credit Facility Capacity | $246,000 | $246,000 |
Material Changes Versus Prior Period
- Revenue Decline: Total revenues decreased by approximately $9.9 million (7.4%) from 2009 to 2010. This was primarily attributable to lower rates at which vessels were re-chartered compared to previous fixed rates and increased voyage expenses due to two vessels operating under voyage charters for part or all of the year.
- Profitability Decrease: Net income dropped significantly from $32.7 million in 2009 to $18.9 million in 2010. This decline was driven by lower charter revenues and higher interest expenses resulting from amended credit facilities with increased interest margins effective June 2009.
- Operating Expenses: Vessel operating expenses decreased slightly to $31.3 million in 2010 from $33.0 million in 2009, largely due to a reduction in extraordinary fees and costs paid to the manager ($2.0 million in 2010 vs. $3.0 million in 2009).
- Equity Issuances: The Company completed two follow-on equity offerings in 2010 (February and August), raising approximately $105.3 million net of commissions. Proceeds were used to re-acquire two vessels (M/T Atrotos and M/T Assos) from Capital Maritime and for general partnership purposes.
- Customer Concentration: BP Shipping Limited accounted for 49% of revenues in 2010, down from 54% in 2009. Morgan Stanley Capital Group Inc. and subsidiaries of Overseas Shipholding Group Inc. accounted for 11% each in 2010.
Guidance, Outlook, Risks, and Contingencies
- Market Outlook: Management notes that while global oil demand returned to growth in 2010, the product tanker market experienced limited improvement due to high supply of tankers and high refined product inventories. Charter rates remain near historically low levels.
- Rechartering Risk: Seven of the 21 vessels are scheduled to have charters expire in 2011. There is a risk that these vessels may be re-chartered at reduced or unprofitable rates, or deployed in the volatile spot market.
- Debt Covenants: The Company maintains two revolving credit facilities ($370 million and $350 million) which are non-amortizing until June 2012 and March 2013, respectively. The Company must maintain specific financial ratios, including a leverage ratio of no more than 0.80 and an EBITDA to interest expense ratio of at least 2.00 to 1.00. A decline in vessel asset values could impair the ability to comply with these covenants.
- Customer Concentration Risk: The Company relies heavily on a limited number of customers. The loss of BP Shipping Limited, the largest customer, or a decline in their demand would materially adversely affect the business. Additionally, BP's financial condition was noted as potentially impacted by the Gulf of Mexico oil spill.
- Regulatory and Environmental Risks: The Company faces increasing regulatory costs related to environmental standards (e.g., MARPOL Annex VI, ballast water management) and safety requirements. Non-compliance could result in vessel detention or increased operating costs.
- Related Party Transactions: The Company is dependent on Capital Ship Management for vessel management and Capital Maritime for vessel acquisitions and charters. Conflicts of interest exist as Capital Maritime's officers also serve as the Company's directors and officers.
Important Facts for Investor Verification
- Charter Expirations: Verify the rechartering status and rates for the seven vessels with charters expiring in 2011, as this will significantly impact future cash flows.
- Debt Covenant Compliance: Confirm the Company's continued compliance with the 0.80 leverage ratio and 2.00 EBITDA/Interest ratio, particularly given the volatility in vessel asset values.
- BP Shipping Exposure: Assess the financial stability of BP Shipping Limited and the potential impact of the Gulf of Mexico oil spill liabilities on their ability to meet charter obligations.
- Related Party Pricing: Review the terms of the management agreement with Capital Ship Management and the pricing of vessel acquisitions from Capital Maritime to ensure they are fair and reasonable.
- Interest Rate Sensitivity: While LIBOR is hedged via swaps, verify the impact of the "Market Disruption Clause" which allows banks to increase funding costs, as evidenced by the interest rate increases noted for Q1 2011.