Capital Clean Energy Carriers Corp. annual report, Q4 FY2013

Business context and reporting period

This is Capital Product Partners L.P.’s Form 20-F for the fiscal year ended December 31, 2013, prepared under U.S. GAAP. The filing identifies the issuer as Capital Product Partners L.P.; this does not match the requested company name, Capital Clean Energy Carriers Corp. The filing reports annual results, not standalone fourth-quarter results.

The partnership owned 30 vessels at year-end: 18 product tankers, four Suezmax crude tankers, seven container ships and one Capesize bulk carrier. Fleet capacity was approximately 2.14 million dwt; average vessel age was 5.8 years and average remaining charter term was 8.8 years. All vessels were chartered under medium- or long-term contracts.

Financial and operating performance

Revenue rose about 11% year over year, mainly reflecting the expanded fleet. Operating margin was approximately 24% of revenue, versus approximately 2% in 2012. The 2013 net income included $42.3 million of bargain-purchase gains from vessel acquisitions and a $31.4 million gain on sale of the OSG bankruptcy claim. These non-operating gains totaled $73.6 million; reported net income therefore substantially reflects unusual items rather than recurring vessel operations.

Operating expenses included $55.3 million of vessel operating costs, $9.5 million of general and administrative expenses and $52.2 million of depreciation and amortization. The partnership recorded a $7.1 million loss on sale of the M/T Agamemnon II and no vessel impairment charge in 2013; 2012 included a $43.2 million impairment charge. Interest and finance costs fell to $16.0 million from $26.7 million, partly following the expiry of interest-rate swaps.

Year-end cash and cash equivalents were $64.0 million, with a further $15.0 million of restricted cash and $150.0 million of undrawn credit availability. Reported total liquidity, including undrawn long-term borrowings, was $229.0 million. Current assets were $73.7 million and current liabilities $38.9 million. Total debt was $583.3 million, up from $458.4 million; $577.9 million was classified as long-term debt and $5.4 million as current. Debt facilities carry floating LIBOR-based rates, and the partnership had no active interest-rate swaps at year-end. A 100-basis-point LIBOR increase was estimated to add approximately $5.3 million to annual interest expense.

Operating cash flow increased, but included approximately $32 million received from Deutsche Bank for assignment of the OSG claims. Investing cash outflow was primarily vessel acquisitions. The partnership issued common and Class B units and drew debt to fund its 2013 container-ship purchases. Partners’ capital was $781.4 million, compared with $573.8 million a year earlier.

Material changes versus the prior comparable period

• Net income swung from a $21.2 million loss to $99.5 million of income, aided by the two large non-operating gains noted above and the absence of the prior-year vessel impairment.
• The fleet expanded with five 2013-built container ships acquired from sponsor Capital Maritime for a total of $325 million, each chartered to Hyundai Merchant Marine (HMM) on a 12-year contract. The M/T Aristotelis was also acquired and the M/T Agamemnon II sold.
• Total debt increased by approximately $124.9 million, while equity issuance and preferred-unit issuance generated funding for acquisitions.
• Revenue from Capital Maritime declined to $55.0 million from $69.9 million, but it remained the largest customer. Revenue concentration shifted: Capital Maritime, BP, Maersk and HMM accounted for 32%, 17%, 14% and 13% of 2013 revenue, respectively.
• Reported 2013 common distributions remained $0.93 per unit for the year. Class B distributions were $0.21375 quarterly per unit, with priority over common-unit distributions.

Outlook, risks and unusual items

Management’s stated objective is to maintain a sustainable quarterly distribution and increase common-unit distributions over time, subject to shipping markets, charter renewals, financing needs and board decisions. The filing provides no specific earnings or distribution-growth guidance. Management said working capital should be sufficient for existing liquidity needs for at least 12 months and reported no capital commitments to buy or build vessels at year-end, while continuing to evaluate acquisitions.

• Charter markets and renewals: Management described tanker charter rates as historically low. A number of tanker charters were due for renewal in 2014, exposing cash flows to weaker replacement rates. Container and drybulk sectors also faced oversupply and cyclical demand risks.
• Customer and related-party exposure: Revenue depends on a limited number of charterers. HMM and COSCO had reported financial difficulties; Capital Maritime is both a major customer and the sponsor-affiliated manager. Related-party transactions and management arrangements create conflicts-of-interest risks.
• OSG bankruptcy claim: Three bareboat charters were reset to $6,250 per day per vessel from substantially higher prior rates. The partnership sold its claims for $32 million and reported a $31.4 million gain. In February 2014, the bankruptcy court approved a $43 million allowed claim settlement; the partnership was required to refund $0.6 million to Deutsche Bank.
• Debt and covenants: Facilities are secured by the fleet and include minimum liquidity, interest coverage, leverage and collateral-maintenance tests. Scheduled amortization was deferred until March 2016, after which substantial repayments and balloon maturities are due. Covenant breaches could restrict distributions or accelerate debt.
• Distributions: Class B units rank senior to common units; common distributions cannot be paid unless Class B distributions are paid or set aside. Distributions remain subject to available cash, reserves, debt covenants and board discretion.
• Asset values and regulation: Management estimated that certain vessels’ aggregate carrying value exceeded estimated charter-free market value by $77.5 million, although its impairment tests supported carrying values. Environmental, safety and emissions rules may increase costs or require vessel investment.
• Controls and audit: Management and Deloitte reported effective internal control over financial reporting at year-end; the independent auditor issued an unqualified opinion on the financial statements.

After year-end, the partnership declared and paid fourth-quarter 2013 distributions of $0.2325 per common unit and $0.21375 per Class B unit.

Most important facts for investors to verify

• Confirm the issuer identity: the supplied filing is for Capital Product Partners L.P., not the company named in the request.
• Separate recurring operating performance from the $73.6 million of bargain-purchase and OSG claim gains when assessing earnings and cash generation.
• Review the $583.3 million debt balance, 2016 amortization start, maturity and balloon schedule, floating-rate exposure, and covenant headroom.
• Assess charter-renewal exposure, especially near-term tanker expiries, and the credit quality of HMM, COSCO, OSG and Capital Maritime.
• Verify Class B distribution priority and conversion terms, common-unit dilution, and the sustainability of distributions against cash flow and debt requirements.
• Reconcile the OSG claim proceeds, $43 million allowed settlement and $0.6 million refund obligation with subsequent cash receipts and accounting.
• Review vessel valuations, impairment assumptions and the concentration of acquisitions and management relationships with Capital Maritime.