Business Context and Reporting Period
Company: Capital Product Partners L.P. (CPLP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2012 (Press Release dated October 31, 2012)
Business Overview: CPLP is an international owner of modern double-hull tankers, including VLCCs, Suezmax crude carriers, and MR product tankers. The fleet consists of 25 vessels under period charters to major energy companies and the company's sponsor, Capital Maritime & Trading Corp.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 |
|---|---|---|
| Total Revenues | $38.0 million | $30.9 million |
| Net Income | $7.2 million | $68.5 million |
| Net Income Per Unit (Common) | $0.06 | $1.50 |
| Operating Surplus | $21.9 million | $10.3 million |
| Adjusted Operating Surplus | $18.6 million | N/A |
| Total Debt | $463.5 million | $633.6 million (Dec 31, 2011) |
| Cash and Equivalents | $39.8 million | $53.4 million (Dec 31, 2011) |
| Partners' Capital | $627.4 million | $517.3 million (Dec 31, 2011) |
Note: Q3 2011 Net Income included a $65.9 million non-recurring gain from a bargain purchase related to the Crude Carriers merger.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 23% year-over-year to $38.0 million, driven by an expanded fleet following the 2011 acquisition and $1.0 million in profit-sharing revenues from the M/T Achilleas.
- Expense Increase: Total expenses rose to $26.9 million from $21.4 million in Q3 2011. This was primarily due to higher vessel operating expenses ($11.3 million vs. $8.6 million) and increased depreciation ($12.0 million vs. $8.6 million) resulting from the larger fleet.
- Debt Reduction: Total debt decreased by $170.1 million to $463.5 million. The company utilized proceeds from the issuance of 15.6 million Class B Convertible Preferred Units (raising ~$140 million) and cash balances to prepay $149.6 million in debt.
- Interest Expense: Total other expense, net, decreased to $3.8 million from $6.8 million, reflecting lower interest costs due to debt reduction and the termination of certain interest rate swaps.
Guidance, Outlook, and Risks
Management Commentary and Guidance
- Distribution Guidance: Management reaffirmed its annual distribution guidance of $0.93 per unit. A quarterly cash distribution of $0.2325 per common unit and $0.21375 per Class B unit was declared for Q3 2012.
- Market Outlook: Management remains positive on product tanker fundamentals, citing low order books and expected demand growth. However, crude tanker spot rates remain depressed due to high inventories and seasonal weakness.
- Charter Coverage: Fleet charter coverage stands at 96% for the remainder of 2012 and 75% for 2013 following new employment agreements for five vessels.
Risks and Contingencies
- OSG Bankruptcy Risk: Three of CPLP's chemical/product tankers are on long-term bareboat charter to subsidiaries of Overseas Shipholding Group (OSG). OSG is evaluating Chapter 11 bankruptcy options. If OSG restructures, it may seek to terminate or modify these charters, which are currently at rates substantially above market levels, potentially adversely affecting future revenues.
- Market Volatility: Product tanker spot earnings remain soft due to sluggish economic growth in the US and Europe. Crude tanker spot rates dropped sharply in July and remained depressed.
Investor Verification Checklist
- OSG Exposure: Verify the status of Overseas Shipholding Group's bankruptcy proceedings and the potential impact on the three bareboat charters (M/T Alexandros II, M/T Aristotelis II, M/T Aris II).
- Debt Structure: Confirm the terms of the amended credit facilities, specifically the deferral of amortization payments until March 31, 2016, and the split between fixed ($59.1 million) and floating ($404.4 million) rate debt.
- Profit Sharing Realization: Monitor the biannual settlement of profit-sharing arrangements on crude vessels to ensure continued revenue contribution similar to the $1.0 million earned in Q3.
- Class B Unit Impact: Assess the dilution and cash flow impact of the 15.6 million Class B Convertible Preferred Units issued in Q2 2012.