Business Context and Reporting Period
Company: 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, 2009.
Business Overview: The Partnership owns and operates a fleet of 18 double-hull, high-specification product and crude oil tankers. As of December 31, 2009, 17 vessels were under medium-to-long-term time or bareboat charters, while one vessel (M/T Attikos) was trading in the spot market. The fleet has an average age of approximately 3.5 years. The Partnership is managed by Capital Ship Management Corp., a subsidiary of Capital Maritime & Trading Corp. ("Capital Maritime"), which also owns a 46.6% interest in the Partnership.
Key Financial Metrics
| Metric (in thousands, except per unit) | 2009 | 2008 |
|---|---|---|
| Revenues | $123,477 | $132,675 |
| Operating Income | $60,684 | $74,094 |
| Net Income | $30,035 | $49,719 |
| Partnership Net Income | $29,225 | $50,767 |
| Net Income per Common Unit (Basic/Diluted) | $1.15 | $1.56 |
| Dividends Declared per Unit | $2.27 | $1.62 |
| Net Cash Provided by Operating Activities | $70,078 | $75,144 |
| Total Assets | $681,087 | $776,883 |
| Total Debt (Long-term + Current) | $474,000 | $526,300 |
| Partners' Capital / Equity | $157,128 | $193,926 |
Note: Total Debt for 2008 includes $474,000 long-term debt and $52,300 related-party debt (current and long-term). In 2009, related-party debt was fully repaid.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by approximately 6.9% to $123.5 million. This was primarily driven by a significant drop in profit-sharing revenues ($0.7 million in 2009 vs. $18.5 million in 2008) due to lower spot market rates, partially offset by a higher average number of vessels in the fleet (18 in 2009 vs. 16.8 in 2008).
- Increased Interest Expense: Interest expense and finance costs rose to $32.1 million from $25.6 million. This increase was attributed to higher interest margins on amended credit facilities (effective June 2009) and higher funding costs incurred by lending banks.
- Net Income Reduction: Net income fell to $30.0 million from $49.7 million, reflecting the lower profit-sharing income and higher interest costs.
- Subordination Termination: On February 14, 2009, the subordination period ended early following an exceptional distribution. All 8,805,522 subordinated units converted to common units on a one-for-one basis.
- Vessel Exchanges: In April 2009, the Partnership exchanged two older vessels (M/T Assos and M/T Atrotos) for two newer vessels (M/T Agamemnon II and M/T Ayrton II) from Capital Maritime, paying an additional cash consideration of $8.0 million.
Guidance, Outlook, and Risks
Guidance and Outlook: On January 29, 2010, management announced a reduction in the target annual distribution level to $0.90 per unit for 2010 (paid equally over four quarters), down from the $2.27 per unit paid in 2008. This decision was driven by the challenging economic environment, lower charter rates, and the expiration of eight vessel charters in 2010. Management believes this level is sustainable even if charter rates remain depressed.
Management Commentary: Management highlighted that while the global economic downturn has reduced oil demand and pressured charter rates, the Partnership's strategy of maintaining medium-to-long-term fixed charters provides a stable revenue base. The Partnership currently has no capital commitments to purchase new vessels.
Risks and Contingencies:
- Rechartering Risk: Eight vessels are scheduled to come off charter in 2010. If these cannot be rechartered at favorable rates, or if they must be deployed in the volatile spot market, earnings and distributions could be materially adversely affected.
- Debt Covenants: The Partnership has two revolving credit facilities totaling $720 million ($474 million drawn). Covenants require maintaining a leverage ratio of no more than 0.80 and a collateral maintenance ratio of 125%. A decline in vessel values could trigger a default or require prepayment of debt.
- Customer Concentration: For 2009, BP Shipping Limited, Morgan Stanley Capital Group Inc., and subsidiaries of Overseas Shipholding Group Inc. accounted for 59%, 22%, and 12% of revenues, respectively.
- Market Conditions: The global economic slowdown and oversupply of tanker capacity continue to exert downward pressure on charter rates and vessel values.
Key Facts for Investor Verification
- Distribution Sustainability: Verify the ability to maintain the new $0.90 per unit distribution target given the expiration of eight charters in 2010 and the current low spot market rates.
- Debt Covenant Compliance: Monitor the Partnership's compliance with the 125% collateral maintenance ratio and 0.80 leverage ratio, especially given the potential for further declines in vessel market values.
- Rechartering Terms: Track the terms and rates at which the eight vessels expiring in 2010 are rechartered, as this will significantly impact future cash flows.
- Related-Party Transactions: Note that Capital Maritime owns 46.6% of the Partnership and manages the fleet. Verify the terms of new charters with Capital Maritime subsidiaries (e.g., M/T Agisilaos and M/T Axios rechartered in early 2010) to ensure they are on arm's-length terms.
- Profit Sharing Volatility: Understand that a significant portion of revenue (10 of 11 time charters) includes profit-sharing arrangements, making earnings highly sensitive to spot market fluctuations.