Filing scope and business context
This is Capital Product Partners L.P.’s audited Form 20-F annual report for the fiscal year ended December 31, 2016—not a quarterly report. The filing identifies the issuer as Capital Product Partners L.P.; it does not identify it as Capital Clean Energy Carriers Corp. The financial statements are prepared under U.S. GAAP, in U.S. dollars. The partnership owned 36 vessels across product and crude tankers, containerships, and drybulk, with an average age of about 7.4 years and average remaining charter term of 5.6 years.
Financial and operating performance
Unless otherwise noted, amounts below are in millions of U.S. dollars. The financial statements were audited by Deloitte, which issued an unqualified opinion on the statements and internal controls.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $241.6 | $220.3 | +9.7% |
| Operating income | $75.7 | $73.8 | +2.5% |
| Operating margin | 31.3% | 33.5% | Down 2.2 percentage points |
| Net income | $52.5 | $55.4 | −5.3% |
| Net margin | 21.7% | 25.1% | Down 3.4 percentage points |
| Net cash from operating activities | $155.1 | $134.2 | +$20.9 |
| Net cash used in investing activities | $(91.8) | $(209.9) | Lower vessel acquisition spending |
| Net cash from/(used in) financing activities | $(46.8) | $1.7 | — |
Revenue growth primarily reflected an average fleet expansion of 2.9 vessels; management said lower average charter rates partly offset the added operating days. Unaffiliated revenue increased to $205.6 million from $156.6 million, while related-party revenue fell to $36.0 million from $63.7 million as fewer vessels were chartered to Capital Maritime. Operating expenses increased, including vessel operating expenses of $77.5 million versus $70.3 million and depreciation and amortization of $71.9 million versus $62.7 million. Interest and finance costs rose to $24.3 million from $20.1 million. Basic and diluted common-unit earnings were $0.34, down from $0.38.
Balance sheet, debt, and distributions
At year-end, cash and cash equivalents were $106.7 million and restricted cash was $18.0 million; the latter was held under credit-facility requirements. Total assets were $1.599 billion, total partners’ capital $927.8 million, and total debt $605.0 million, up from $571.6 million. There were no undrawn amounts under the credit facilities. The weighted-average loan rate was 4.01%, versus 3.65% a year earlier; debt is floating-rate LIBOR-based. Management estimated a 100-basis-point LIBOR increase would add about $6.1 million to annual interest expense.
Scheduled principal payments were $40.5 million in 2017, $119.4 million in 2018, $275.4 million in 2019, and $156.9 million in 2020. The board created a capital reserve, allocating about $14.6 million quarterly toward amortization through 2018; $58.6 million had been allocated by year-end. The partnership reported covenant compliance at December 31, 2016. Its facilities include liquidity, interest coverage, leverage, and vessel-collateral tests, and are secured by its vessels.
Common-unit distributions were cut in 2016 to protect liquidity: the board set guidance at $0.075 quarterly in April and raised it to $0.08 for the fourth quarter after the M/T Amor acquisition. Total declared distributions were $0.46 per common unit for 2016 versus $0.94 in 2015. Class B distributions were $0.86 per unit for 2016; those units rank ahead of common units for distributions. The board declared fourth-quarter 2016 distributions of $0.08 per common unit and $0.21375 per Class B unit, payable in February 2017. Common distributions are discretionary and subject to reserves, debt restrictions, and Class B priority.
Material changes, outlook, risks, and unusual items
- HMM restructuring: Five containership charters were reduced 20%, from $29,350 to $23,480 per day, from July 2016 through December 2019, reducing expected charter revenue by about $37 million over that period. The partnership received and sold HMM shares for $29.7 million; the original charter rate is scheduled to resume after the reduction period. HMM remained financially stressed.
- Acquisitions and equity: The partnership acquired the final Dropdown containership, CMA CGM Magdalena, for $81.5 million, partly debt-funded, and acquired the M/T Amor from its sponsor for stated consideration of $16.9 million, including cash, units, and assumed debt. An at-the-market program authorized up to $50 million; 1.4 million units generated $4.5 million net proceeds before offering expenses in 2016.
- Market conditions and charter exposure: Management described weaker tanker markets and depressed container charter rates and vessel values. HMM, Petrobras, CMA CGM, and Capital Maritime accounted for 19%, 18%, 17%, and 15% of 2016 revenue, respectively. Charter coverage was 82% for 2017 and 48% for 2018. The company also cited significant market pressure in drybulk, although its Cape Agamemnon had a $42,200 daily charter rate and earliest expiry in June 2020, with revenue protection insurance subject to policy limits and renewal.
- Asset values and impairment: No vessel impairment was recorded for 2016. Management nevertheless estimated that the charter-free market value of certain vessels was about $388.8 million below their aggregate carrying value, compared with $130.1 million in 2015; management concluded projected undiscounted cash flows supported carrying values.
- Other notable matters: Five vessels incurred 135 off-hire days for drydocking in 2016; none were scheduled for drydock in 2017. Only 12 of 36 vessels had ballast-water treatment systems installed. The filing disclosed nine CPLP-vessel port calls to Iran in 2016, including one voyage involving the National Iranian Oil Company, and stated the activities were believed permissible under applicable sanctions. It also described ongoing Greek football investigations involving the sponsor’s chairman, who was CPLP’s former chairman; the filing does not report a conclusion in those proceedings.
- Key risks: Shipping-market cyclicality, charterer default or renegotiation, customer concentration, refinancing and covenant risk, falling vessel values, floating-rate debt, environmental compliance costs (including the 2020 sulphur cap and ballast-water rules), and reliance on the sponsor and affiliated manager. Management expected working capital to cover existing liquidity needs for at least 12 months, but refinancing future maturities was not assured.
Investor verification priorities
- Confirm the issuer and filing period: the source is Capital Product Partners L.P.’s 2016 annual report, not a 2016 Q4 filing for Capital Clean Energy Carriers Corp.
- Review the HMM restructuring’s realized and future cash-flow effects, counterparty credit, and restoration terms for the five charters.
- Assess the 2017–2020 debt maturity schedule, reserve funding, refinancing plans, collateral headroom, and covenant compliance under weaker vessel values.
- Reconcile reported operating cash flow with the HMM share sale and deferred charter revenue treatment, and distinguish restricted from available cash.
- Evaluate distribution sustainability and Class B seniority, including the substantial reduction in common-unit distributions.
- Check charter expirations, renewal rates, and exposure to the four largest revenue counterparties, alongside the disclosed vessel-value shortfall and environmental retrofit obligations.