Business Context and Reporting Period
Company: Capital Product Partners L.P. (Capital Clean Energy Carriers Corp. in metadata, but filing identifies as Capital Product Partners L.P.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: The Partnership is a Marshall Islands limited partnership engaged in the seaborne transportation of crude oil and refined petroleum products. As of December 31, 2008, the fleet consisted of 18 double-hull tankers, primarily medium-range (MR) product tankers. The company operates under medium-to-long-term time and bareboat charters with major oil companies and traders. Capital Maritime & Trading Corp. (CMTC) owns approximately 46.6% of the Partnership and provides management services through its subsidiary, Capital Ship Management Corp.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | 2008 (in thousands) | 2007 (in thousands) |
|---|---|---|
| Revenues | $131,514 | $86,545 |
| Operating Income | $73,482 | $47,177 |
| Net Income | $49,263 | $30,959 |
| Net Income Attributable to Limited Partners | $48,294 | $21,140 |
| Net Cash Provided by Operating Activities | $72,786 | $53,014 |
| Net Cash Used in Investing Activities | $(203,269) | $(335,047) |
| Net Cash Provided by Financing Activities | $153,713 | $300,713 |
| Total Assets | $700,154 | $556,991 |
| Total Debt (Long-term + Current) | $474,000 | $282,580 |
| Partners' Equity | $172,175 | $185,181 |
| Cash and Cash Equivalents | $43,149 | $19,919 |
Note: All figures are in thousands of U.S. Dollars. Net income per common unit was $2.00 for 2008 compared to $1.11 for 2007.
Material Changes vs. Prior Period
- Fleet Expansion: The average number of vessels in the fleet increased from 11.6 in 2007 to 16.8 in 2008. The Partnership acquired three additional vessels from CMTC in 2008 (M/T Amore Mio II, M/T Aristofanis, and three newbuildings delivered in 2008), significantly increasing carrying capacity.
- Revenue Growth: Revenues increased by approximately 52% to $131.5 million, driven by the larger fleet and higher profit-sharing revenues ($18.5 million in 2008 vs. $6.0 million in 2007).
- Expense Increases: Total operating expenses rose to $58.0 million from $39.4 million. Vessel operating expenses (related party) increased to $25.6 million due to the larger fleet. Depreciation and amortization increased to $25.0 million.
- Debt Levels: Long-term debt increased significantly to $474.0 million from $281.8 million. This reflects the drawdown of a new $350 million credit facility entered into in March 2008 and additional borrowings under the existing $370 million facility to fund vessel acquisitions.
- Equity Reduction: Total partners' equity decreased by $13.0 million to $172.2 million, primarily due to a negative adjustment of $33.4 million related to the fair value of interest rate swaps, partially offset by net income.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management anticipates that the severe global economic slowdown and deterioration in credit markets will negatively impact world trade and tanker demand. Despite this, the company's strategy focuses on maintaining stable cash flows through long-term fixed-rate charters and profit-sharing arrangements. The board determined that in the current market conditions, there are limited opportunities for accretive vessel acquisitions. The company expects to rely on external financing for future expansion.
Unusual Items
- Exceptional Distribution: On January 30, 2009, the company announced an exceptional non-recurring distribution of $1.05 per unit for Q4 2008. This brought total 2008 distributions to $2.27 per unit.
- Subordination Termination: The exceptional distribution triggered the early termination of the subordination period. Consequently, all 8,805,522 subordinated units automatically converted to common units on February 14, 2009. Following this conversion, Capital Maritime owns 46.6% of the common units.
- Interest Rate Swaps: The company entered into multiple interest rate swap agreements to fix the LIBOR portion of its debt. The fair value adjustment of these swaps resulted in a significant unrealized loss recorded in accumulated other comprehensive loss.
Risks and Contingencies
- Economic Downturn: A protracted global recession could reduce demand for oil and refined products, lowering charter rates and vessel values.
- Customer Concentration: For 2008, BP Shipping Limited (54%) and Morgan Stanley Capital Group Inc. (33%) accounted for 87% of total revenues. Loss of these customers would be material.
- Debt Covenants: The company must maintain specific financial ratios (e.g., EBITDA to interest expense of at least 2.00:1 and debt-to-fleet value ratios). A decline in vessel values due to the economic slowdown could impair the ability to comply with these covenants, potentially restricting distributions or triggering defaults.
- Regulatory Compliance: Stricter environmental regulations (e.g., MARPOL Annex VI, ballast water management) may require significant capital expenditures.
Important Facts for Investor Verification
- Capital Maritime Control: Verify the extent of Capital Maritime's control (46.6% ownership) and potential conflicts of interest regarding related-party transactions, including management fees and vessel acquisitions.
- Debt Covenant Compliance: Confirm current compliance with debt covenants, specifically the ratio of net indebtedness to the fair market value of the fleet, given the potential decline in vessel values during the economic downturn.
- Customer Concentration: Assess the creditworthiness and stability of BP Shipping Limited and Morgan Stanley Capital Group Inc., which together represent the vast majority of revenue.
- Profit Sharing Realization: Verify the calculation and collection of profit-sharing revenues, which are contingent on spot market rates exceeding base charter rates.
- Subsequent Events: Review the impact of the February 2009 exceptional distribution and the conversion of subordinated units on the capital structure and future distribution policies.