Business Context and Reporting Period
Company: Capital Product Partners L.P. (Nasdaq: CPLP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter and Six Months ended June 30, 2010
Date of Filing: July 30, 2010
Business Overview: An international owner of modern double-hull tankers engaged in the seaborne transportation of crude oil, refined petroleum products, edible oils, and soft chemicals. As of June 30, 2010, the fleet consisted of 20 vessels (17 modern MR tankers, 2 small product tankers, and 1 Suezmax crude oil tanker).
Key Financial Metrics
| Metric | Q2 2010 (3 Months) | Q2 2009 (3 Months) | YTD 2010 (6 Months) | YTD 2009 (6 Months) |
|---|---|---|---|---|
| Total Revenues | $31.8 million | $33.4 million | $65.2 million | $68.4 million |
| Net Income (Partnership) | $5.2 million | $8.0 million | $11.9 million | $16.8 million |
| Net Income Per Unit | $0.16 | $0.32 | $0.41 | $0.66 |
| Operating Surplus (Non-GAAP) | $10.2 million | $11.5 million | N/A | N/A |
| Operating Expenses | $16.2 million | $17.0 million | $36.4 million | $35.1 million |
| Net Interest Expense | $8.0 million | $7.3 million | $16.5 million | $15.7 million |
| Long-Term Debt | $474.0 million | $474.0 million | $474.0 million | $474.0 million |
| Partners' Capital | $192.7 million | N/A | $192.7 million | $157.1 million |
| Cash & Equivalents | $3.6 million | N/A | $3.6 million | $3.6 million |
| Total Liquidity | $270.2 million | N/A | $270.2 million | $284.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by 5% year-over-year for the six-month period ($65.2M vs $68.4M). This was primarily due to lower charter rates on re-chartered vessels, partially offset by the inclusion of new acquisitions (M/T Atrotos and M/T Alkiviadis) and $0.2M in profit share revenues from the Suezmax market.
- Net Income Decrease: Net income attributable to the Partnership dropped 29% year-over-year for the six-month period ($11.9M vs $16.8M). The decline is attributed to lower revenues and higher interest expenses ($16.5M vs $15.7M) resulting from increased interest margins on loan facilities and lower cash deposit rates.
- Acquisitions: The Partnership acquired two vessels from its sponsor, Capital Maritime & Trading Corp (CMTC):
- M/T Atrotos: Acquired March 1, 2010, for $43.0 million. Chartered to PEMEX until 2014.
- M/T Alkiviadis: Acquired June 30, 2010, for $31.5 million. Chartered to CMTC for two years.
- Related Party Debt: Related party debt was fully repaid by CMTC upon the transfer of the M/T Atrotos and M/T Alkiviadis, reducing related party liabilities to zero as of June 30, 2010.
Guidance, Outlook, and Risks
- Distribution Guidance Revision: Management revised the annual distribution guidance upward from $0.90 to $0.93 per unit, commencing with the Q3 2010 distribution. This increase is supported by improved market conditions and accretive vessel acquisitions.
- Market Outlook: Management notes an improvement in the product tanker market from historic lows, with higher spot earnings and refinery utilization. The Suezmax market remains strong. However, the company continues to monitor oil demand, refinery utilization, and the single-hull tanker phase-out.
- Charter Coverage: Following the M/T Alkiviadis acquisition, 81% of the fleet's total days for the remainder of 2010 and 52% for 2011 are secured under period charters.
- Key Risks:
- BP Shipping Concentration: BP Shipping is the largest customer, accounting for approximately 49% of revenues for the six months ended June 30, 2010. BP's financial distress following the Deepwater Horizon incident poses a material risk to the Partnership's cash flows and ability to meet obligations.
- Debt Covenants: The Partnership must maintain specific financial ratios (EBITDA to net interest expense, debt-to-fleet value). A decline in vessel market values could impair compliance, potentially triggering defaults or limiting future financing.
- Interest Rate Exposure: Higher interest margins on credit facilities have increased financing costs.
Investor Verification Checklist
- BP Exposure: Verify the current financial stability of BP Shipping and the status of the 8 vessels chartered to them, given BP's recent $32.2 billion pre-tax charge.
- Debt Covenant Compliance: Confirm the Partnership's continued compliance with the 80% loan-to-value covenant and EBITDA/interest coverage ratios, especially given potential volatility in vessel valuations.
- Charter Rate Sustainability: Assess the risk of re-chartering vessels expiring in 2010-2011 at rates lower than current levels, which could impact the ability to sustain the revised $0.93 distribution guidance.
- Related Party Transactions: Review the terms of the new charters with CMTC (M/T Alkiviadis, M/T Agisilaos, M/T Axios) to ensure they are at fair market value, particularly now that the Partnership is no longer considered "controlled" by the sponsor.
- Liquidity Position: Monitor the $270.2 million total liquidity (including undrawn credit facilities) against upcoming capital expenditures and distribution obligations.