UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 20-F
(Mark
One)
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o
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2009
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
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OR
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o
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company
report:
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Commission
file number: 1-33373
CAPITAL
PRODUCT PARTNERS L.P.
(Exact
name of Registrant as specified in its charter)
Republic
of The Marshall Islands
(Jurisdiction
of incorporation or organization)
3
Iassonos Street, Piraeus, 18537 Greece
+30 210 458 4950
(Address and telephone number of principal executive offices)
Ioannis
E. Lazaridis
Chief Executive
Officer and Chief Financial Officer
3
Iassonos Street, Piraeus, 18537 Greece
Tel.
+30 210 458 4950
Fax. +30 210 428
4285
(Name,
address and telephone and facsimile numbers of contact person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
units representing limited partnership interests
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Nasdaq
Global Market
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Securities
registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of
the Act: None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
24,817,151
Common Units
506,472
General Partner Units
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES o NO x
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
YES o NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files.)
YES
o NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S.
GAAP x
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International
Financial Reporting Standards as issued o
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Other o
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by
the International Accounting Standards Board
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statements item the registrant has elected to
follow.
ITEM
17 o ITEM
18 o
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
CAPITAL
PRODUCT PARTNERS L.P.
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Not
applicable
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applicable
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applicable
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Not
applicable
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Not
applicable
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___________
This annual report on Form 20-F (the
“Annual Report”) should be read in conjunction with our audited consolidated and
combined financial statements and accompanying notes included
herein.
Statements included in this Annual
Report which are not historical facts (including statements concerning plans and
objectives of management for future operations or economic performance, or
assumptions related thereto) are forward-looking statements. In addition, we and
our representatives may from time to time make other oral or written statements
which are also forward-looking statements. Such statements include, in
particular, statements about our plans, strategies, business prospects, changes
and trends in our business, financial condition and the markets in which we
operate, and involve risks and uncertainties. In some cases, you can identify
the forward-looking statements by the use of words such as “may”, “could”,
“should”, “would,” “expect”, “plan”, “anticipate”, “intend”, “forecast”,
“believe”, “estimate”, “predict”, “propose”, “potential”, “continue” or the
negative of these terms or other comparable terminology. Forward-looking
statements appear in a number of places and include statements with respect to,
among other things:
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expectations of our ability to
make cash distributions on the
units;
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our future financial condition
or results of operations and our future revenues and expenses, including
revenues from profit sharing arrangements and required levels of
reserves;
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future levels of operating
surplus and levels of distributions as well as our future cash
distribution policy;
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the potential results of the
early termination of the subordination
period;
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tanker market conditions and
fundamentals, including the balance of supply and demand in those
markets;
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future charter hire rates and
vessel values;
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anticipated future acquisition
of vessels from Capital Maritime & Trading Corp. (“Capital Maritime”
or “CMTC”) or from third
parties;
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anticipated chartering
arrangements with Capital Maritime in the
future;
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our anticipated growth
strategies;
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our ability to access debt,
credit and equity markets;
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the repayment of debt and
settling of interest rate swaps, if
any;
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the effectiveness of our risk
management policies and procedures and the ability of counterparties to
own derivative contracts to fulfill their contractual
obligations;
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future refined product and
crude oil prices and
production;
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planned capital expenditures
and availability of capital resources to fund capital
expenditures;
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future supply of, and demand
for, refined products and crude
oil;
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increases in domestic or
worldwide oil consumption;
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changes in interest
rates;
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our ability to maintain
long-term relationships with major refined product importers and
exporters, major crude oil companies, and major commodity
traders;
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our ability to maximize the
use of our vessels, including the re-deployment or disposition of vessels
no longer under long-term time
charter;
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our ability to leverage to our
advantage Capital Maritime’s relationships and reputation in the shipping
industry;
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our continued ability to enter
into long-term, fixed-rate time charters with our tanker charterers and to
re-charter our vessels as their existing charters
expire;
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obtaining tanker projects that
we or Capital Maritime bid
on;
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changes in the supply of
tanker vessels, including newbuildings or lower than anticipated scrapping
of older vessels;
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our ability to compete
successfully for future chartering and newbuilding
opportunities;
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the expected
changes to the regulatory requirements applicable to the oil
transportation industry, including, without limitation, requirements
adopted by international organizations or by individual countries or
charterers and actions taken by regulatory authorities and governing such
areas as safety and environmental
compliance;
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the expected cost of, and our
ability to comply with, governmental regulations and maritime
self-regulatory organization standards, as well as standard regulations
imposed by our charterers applicable to our
business;
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our anticipated general and
administrative expenses and our expenses under the management agreement
and the administrative services agreement with Capital Ship Management
Corp., a subsidiary of Capital Maritime (“Capital Ship
Management”), and for reimbursement for fees and costs of our general
partner;
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increases in costs and
expenses including but not limited to: crew wages, insurance, provisions,
lube oil, bunkers, repairs, maintenance and general and administrative
expenses;
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the adequacy of our insurance
arrangements;
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the expected impact of
heightened environmental and quality concerns of insurance underwriters,
regulators and charterers;
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the anticipated taxation of
our partnership and distributions to our
unitholders;
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estimated future maintenance
and replacement capital
expenditures;
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expected demand in the
shipping sectors in which we operate in general and the demand for our
medium range vessels in
particular;
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the expected lifespan of our
vessels;
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our ability to employ and
retain key employees;
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customers’ increasing emphasis
on environmental and safety
concerns;
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expected financial flexibility
to pursue acquisitions and other expansion
opportunities;
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anticipated funds for
liquidity needs and the sufficiency of cash
flows;
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our ability to increase our
distributions over time;
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future sales of our units in
the public market; and
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our business strategy and
other plans and objectives for future
operations.
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These and other forward-looking
statements are made based upon management’s current plans, expectations,
estimates, assumptions and beliefs concerning future events impacting us and
therefore involve a number of risks and uncertainties, including those risks
discussed in below in Item 3. Key Information–Risk
Factors. The risks, uncertainties and assumptions involve known and
unknown risks and are inherently subject to significant uncertainties and
contingencies, many of which are beyond our control. We caution that
forward-looking statements are not guarantees and that actual results could
differ materially from those expressed or implied in the forward-looking
statements.
We undertake no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict all of these factors. Further, we cannot assess the
impact of each such factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to be materially different from
those contained in any forward- looking statement. You should carefully review
and consider the various disclosures included in this Annual Report and in our
other filings made with the U.S. Securities and Exchange Commission (the “SEC”)
that attempt to advise interested parties of the risks and factors that may
affect our business, prospects and results of operations.
Not Applicable.
Not Applicable.
Selected Financial Data
We have derived the following selected
historical financial and other data for the three years ending December 31,
2009, from our audited consolidated and
combined financial statements for the years ended December 31, 2009, 2008 and
2007 (the “Financial Statements”) respectively, appearing elsewhere in this
Annual Report. The historical financial data presented for the year ended
December 31, 2006 and 2005 have been derived from audited financial statements
not included in this Annual Report and are provided for comparison purposes
only.
Our historical results are not
necessarily indicative of the results that may be expected in the future.
Specifically, the financial statements for the years ended December 31, 2006 and
2005 are not comparable to our financial statements for the years ended December
31, 2009, 2008 and 2007. Our initial public offering on April 3, 2007, and
certain other transactions that occurred thereafter, including the delivery or
acquisition of ten additional vessels, the exchange of two vessels, the new
charters our vessels entered into, the agreement we entered into with Capital
Ship Management for the provision of management and administrative services to
our fleet for a fixed fee and certain new financing and interest rate swap
arrangements we entered into, have affected our results of operations.
Furthermore, for the year ended December 31, 2006, only six of the vessels in
our current fleet had been delivered to Capital Maritime and only two were in
operation for the full year. In addition, all the vessels comprising our fleet
at the time of our initial public offering as well as the subsequently acquired
M/T Attikos and the M/T Aristofanis were under construction during the year
ended December 31, 2005. The M/T Attikos and the M/T Aristofanis were delivered
to Capital Maritime in January and June 2005, respectively. Consequently, the
below table should be read together with, and is qualified in its entirety by
reference to, the Financial Statements and the accompanying notes included
elsewhere in this Annual Report. The table should also be read together with
“Item 5A: Operating and Financial Review and Prospects—Management’s Discussion
and Analysis of Financial Condition and Results of Operations”.
Our Financial Statements are prepared
in accordance with United States generally accepted accounting principles after
giving retroactive effect to the combination of entities under common control as
described in Note 1 (Basis of Presentation and General Information) to the
Financial Statements included herein. All numbers are in thousands of U.S.
Dollars, except numbers of units and earnings per unit.
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Year
Ended
Dec.31, 2009
(1)
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Year
Ended
Dec. 31, 2008
(1)
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Year
Ended
Dec. 31, 2007
(1)
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Year
Ended
Dec. 31, 2006
(1)
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Year
Ended
Dec. 31, 2005
(1)
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Income
Statement Data:
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Revenues
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$ | 123,477 | $ | 132,675 | $ | 86,545 | $ | 24,605 | $ | 6,671 | ||||||||||
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Expenses:
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Voyage
expenses (2)
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1,059 | 1,123 | 3,553 | 427 | 555 | |||||||||||||||
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Vessel
operating expenses—related-party (3)
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30,095 | 25,653 | 12,688 | 1,124 | 360 | |||||||||||||||
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Vessel
operating expenses (3)
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499 | 3,803 | 6,287 | 5,721 | 3,285 | |||||||||||||||
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General
and administrative
expenses
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2,876 | 2,817 | 1,477 | - | - | |||||||||||||||
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Depreciation
and
amortization
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28,264 | 25,185 | 15,363 | 3,772 | 595 | |||||||||||||||
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Total
operating expenses
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62,793 | 58,581 | 39,368 | 11,044 | 4,795 | |||||||||||||||
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Operating
income (expense)
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60,684 | 74,094 | 47,177 | 13,561 | 1,876 | |||||||||||||||
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Interest
expense and finance costs
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(32,115 | ) | (25,602 | ) | (13,121 | ) | (5,117 | ) | (653 | ) | ||||||||||
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Loss
on interest rate swap agreement
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- | - | (3,763 | ) | - | - | ||||||||||||||
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Interest
income
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1,478 | 1,283 | 711 | 13 | 6 | |||||||||||||||
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Foreign
currency gain/(loss), net
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(12 | ) | (56 | ) | (45 | ) | (63 | ) | 18 | |||||||||||
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Net
income (loss)
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$ | 30,035 | $ | 49,719 | $ | 30,959 | $ | 8,394 | $ | 1,247 | ||||||||||
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Less:
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Net
(loss) / income attributable to CMTC operations:
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810 | (1,048 | ) | 9,388 | 8,394 | 1,247 | ||||||||||||||
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Partnership’s
net income
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29,225 | 50,767 | 21,571 | - | - | |||||||||||||||
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General
partner’s interest in our net income
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584 | 13,485 | 431 | - | - | |||||||||||||||
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Limited
partners’ interest in our net income
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28,641 | 37,282 | 21,140 | - | - | |||||||||||||||
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Net
income allocable to limited partner per (4):
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Common unit (basic and
diluted)
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1.15 | 1.56 | 1.11 | - | - | |||||||||||||||
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Subordinated unit (basic and
diluted)
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1.17 | 1.50 | 0.70 | - | - | |||||||||||||||
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Total unit (basic and
diluted)
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1.15 | 1.54 | 0.95 | - | - | |||||||||||||||
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Weighted-average
units outstanding (basic and diluted):
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Common units
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23,755,663 | 15,379,212 | 13,512,500 | - | - | |||||||||||||||
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Subordinated units
(5)
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1,061,488 | 8,805,522 | 8,805,522 | - | - | |||||||||||||||
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Total units
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24,817,151 | 24,184,734 | 22,318,022 | - | - | |||||||||||||||
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Balance Sheet Data (at
end of period):
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Vessels,
net and under construction
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$ | 638,723 | $ | 718,153 | $ | 535,165 | $ | 227,517 | $ | 59,926 | ||||||||||
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Total
assets
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681,087 | 776,883 | 566,957 | 237,828 | 61,692 | |||||||||||||||
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Total
partners’ capital / stockholders’ equity
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157,128 | 193,926 | 194,341 | 61,067 | 25,566 | |||||||||||||||
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Number
of shares/units
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25,323,623 | 25,323,623 | 22,773,492 | 5,200 | 4,200 | |||||||||||||||
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Common
units
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24,817,151 | 16,011,629 | 13,512,500 | - | - | |||||||||||||||
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Subordinated
units
(5)
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- | 8,805,522 | 8,805,522 | - | - | |||||||||||||||
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General
Partner
units
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506,472 | 506,472 | 455,470 | - | - | |||||||||||||||
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Dividends
declared per unit
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$ | 2.27 | $ | 1.62 | $ | 0.75 | - | - | ||||||||||||
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Cash
Flow Data:
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Net
cash provided by operating activities
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$ | 70,078 | $ | 75,144 | $ | 53,663 | $ | 10,422 | $ | 2,219 | ||||||||||
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Net
cash used in investing
activities
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(55,770 | ) | (270,003 | ) | (335,696 | ) | (171,364 | ) | (34,322 | ) | ||||||||||
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Net
cash provided by financing activities
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(53,905 | ) | 218,089 | 300,713 | 162,174 | 32,095 | ||||||||||||||
___________
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(1)
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The
amount of historical earnings per unit
for:
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a)
the years ended December 31, 2005 and
2006,
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b)
the period from January 1, 2007 to April 3, 2007 for the vessels in our
fleet at the time of our initial public
offering,
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c)
the period from January 1, 2007 to September 23, 2007, March 26, 2008 and
April 29, 2008 for the M/T Attikos, the M/T Amore Mio II and
the M/T Aristofanis, respectively,
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d)
the years ended December 31, 2007 and 2008 and the period from January 1,
2009 to April 6, 2009 and April 12, 2009 for the M/T Agamemnon II, and M/T
Ayrton II respectively, giving retroactive impact to the number of common
and subordinated units (and the 2% general partner interest) that were
issued, is not presented in our selected historical financial data. We do
not believe that a presentation of earnings per unit for these periods
would be meaningful to our investors as the vessels comprising our current
fleet were either under construction or operated as part of Capital
Maritime’s fleet with different terms and conditions than those in place
after their acquisition by us.
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(2)
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Vessel
voyage expenses primarily consist of commissions, port expenses, canal
dues and bunkers.
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(3)
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Since
April 4, 2007, our vessel operating expenses have consisted primarily of
management fees payable to Capital Ship Management Corp., our manager, who
provides commercial and technical services such as crewing, repairs and
maintenance, insurance, stores, spares and lubricants, as well as
administrative services pursuant to management and administrative services
agreements.
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(4)
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On
January 1, 2009 we adopted new accounting guidance relating to the
Application of the Two-Class Method and its application to Master Limited
Partnerships which considers whether the incentive distributions of a
master limited partnership represent a participating security when
considered in the calculation of earnings per unit under the Two-Class
Method. This new guidance also considers whether the partnership agreement
contains any contractual limitations concerning distributions to the
incentive distribution rights that would impact the amount of earnings to
allocate to the incentive distribution rights for each reporting period.
We retrospectively applied the provisions of this new guidance to the
years ended December 31, 2007 and 2008. Following the application of the
above guidance our earnings per unit for the year ended December 31, 2008
decreased from $2.00 to $1.54. For the year ended December 31, 2007 our
earnings per unit remained
unchanged.
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(5)
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Following
the early termination of the subordination period on February 14, 2009,
all of our 8,805,522 subordinated units converted into common units on a
one-for-one basis. Please read Item 7B: “Termination of the Subordination
period” for additional information.
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Risk
Factors
Some of
the following risks relate principally to the countries and the industry in
which we operate and the nature of our business in general. Although many
of our business risks are comparable to those of a corporation engaged in a
similar business would face, limited partner interests are inherently different
from the capital stock of a corporation. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial also may impair our business
operations. In particular, if any of the following risks actually occurs,
our business, financial condition or operating results could be materially
adversely affected. In that case, we might not be able to pay distributions on
our common units, the trading price of our common units could decline, and you
could lose all or part of your investment.
Risks
Inherent in Our Business
The
current global economic downturn may have a material adverse effect on our
business, financial position and results of operations as well as on our ability
to recharter our vessels at favorable rates.
Oil has
been one of the world’s primary energy sources for a number of decades. The
global economic growth of previous years had a significant impact on the demand
for oil and subsequently on the oil trade and shipping demand. However, during
the second half of 2008 and throughout 2009 we have experienced a major economic
slowdown which is ongoing and the duration of which is very difficult to
forecast and which has, and is expected to continue to have, a significant
impact on world trade, including the oil trade. In this global economy,
operating businesses have been facing tightening credit, weakening demand for
goods and services, deteriorating international liquidity conditions, and
declining financial markets. Demand for oil and refined petroleum products has
contracted sharply as a result of the global economic slow-down, which in
combination with the diminished availability of trade credit has led to
decreased demand for tanker vessels, creating downward pressure on charter
rates. This economic downturn has also affected vessel values
overall. If the current global economic environment persists we may
not be able to operate our vessels profitably or employ our vessels at favorable
charter rates as they come up for rechartering. Furthermore, a significant
decrease in the market value of our vessels may cause us to recognize losses if
any of our vessels are sold or if their values are impaired, and may affect our
ability to comply with our loan covenants. A continuing negative change in
global economic conditions is expected to have a material adverse effect on our
business, financial position, results of operations and ability to make cash
distributions and comply with our loan covenants, as well as our future
prospects and ability to grow our fleet.
Changes
in the oil markets could result in decreased demand for our vessels and
services.
Demand
for our vessels and services in transporting oil depends upon world and regional
oil markets. Any decrease in shipments of refined petroleum products in those
markets could have a material adverse effect on our business, financial
condition and results of operations. Historically, those markets have been
volatile as a result of the many conditions and events that affect the price,
production and transport of oil, including competition from alternative energy
sources. In the long term, oil demand may be reduced by an increased reliance on
alternative energy sources and/or a drive for increased efficiency in the use of
oil as a result of environmental concerns or high oil prices. The current
recession affecting the U.S. and world economies may result in protracted
reduced consumption of oil products and a decreased demand for our vessels and
lower charter rates, which could have a material adverse effect on our business,
results of operations, cash flows, financial condition and ability to make cash
distributions.
We
may not have sufficient cash from operations to enable us to pay the quarterly
distribution on our common units following the establishment of cash reserves
and payment of fees and expenses.
We may
not have sufficient cash available each quarter to pay the declared quarterly
distribution per common unit following establishment of cash reserves and
payment of fees and expenses. The amount of cash we can distribute on our common
units principally depends upon the amount of cash we generate from our
operations, which may fluctuate based on numerous factors generally described
under this “Risk Factors” heading, including, among other
things:
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the
rates we obtain from our charters;
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our
ability to recharter our vessels at competitive rates as their current
charters expire;
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the
ability of our customers to meet their obligations under the terms of the
charter agreements, including the timely payment of the rates under the
agreements;
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the
continued sustainability of our
customers;
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the
level of additional revenues we generate from our profit sharing
arrangements, if any;
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the
level of our operating costs, such as the cost of crews and insurance,
following the expiration of our management agreement pursuant to which we
pay a fixed daily fee for an initial term of approximately five years from
the time we take delivery of each vessel, which includes the expenses for
its next scheduled special or intermediate survey, as applicable, and
related drydocking;
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the
number of unscheduled off-hire days for our fleet and the timing of, and
number of days required for, scheduled drydocking of our
vessels;
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the
amount of extraordinary costs incurred by our manager while managing our
vessels not covered under our fixed fee arrangement which we may have to
reimburse our manager for;
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delays
in the delivery of any newbuildings we may contract to acquire and the
beginning of payments under charters relating to those
vessels;
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demand
for seaborne transportation of refined oil products and crude
oil;
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supply
of product and crude oil tankers and specifically the number of
newbuildings entering the world tanker fleet each
year;
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force
majeure events;
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prevailing
global and regional economic and political conditions;
and
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the
effect of governmental regulations and maritime self-regulatory
organization standards on the conduct of our
business.
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The actual amount of cash we will have
available for distribution also will depend on other factors, some of which are
beyond our control, such as:
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the
level of capital expenditures we make, including for maintaining vessels,
building new vessels, acquiring existing vessels and complying with
regulations;
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our
debt service requirements, including our obligation to pay increased
interest costs in certain circumstances, and restrictions on distributions
contained in our debt instruments;
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our
ability to comply with covenants under our credit facilities, including
our ability to comply with certain ‘asset maintenance’
ratios
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interest
rate fluctuations;
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the
cost of acquisitions, if any;
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fluctuations
in our working capital needs;
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our
ability to make working capital borrowings, including to pay distributions
to unitholders; and
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the
amount of any cash reserves, including reserves for future maintenance and
replacement capital expenditures, working capital and other matters,
established by our board of directors in its
discretion.
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The amount of cash we generate from our
operations may differ materially from our profit or loss for the period, which
will be affected by non-cash items. As a result of this and the other factors
mentioned above, we may make cash distributions during periods when we record
losses and may not make cash distributions during periods when we record net
income.
The
shipping industry is cyclical, which may lead to lower charter hire rates,
defaults of our charterers and lower vessel values, resulting in decreased
distributions to our unitholders.
The
shipping industry is cyclical, which may result in volatility in charter hire
rates and vessel values. We may not be able to successfully charter our vessels
in the future or renew existing charters at the same or similar rates. Even if
we manage to successfully charter our vessels in the future, our charterers may
go bankrupt or fail to perform their obligations under the charter agreements,
they may delay payments or suspend payments altogether, they may terminate the
charter agreements prior to the agreed upon expiration date or they may attempt
to re-negotiate the terms of the charters. If we are required to enter into a
charter when charter hire rates are low, our results of operations and our
ability to make cash distributions to our unitholders could be adversely
affected.
In addition, the market value and
charter hire rates of product and crude oil tankers can fluctuate substantially
over time due to a number of different factors, including:
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regional availability of refining capacity; | |
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prevailing
economic conditions in the market in which the vessel
trades;
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availability
of credit to charterers and traders in order to finance expenses
associated with the relevant trades;
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regulatory
change;
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levels of demand for the seaborne transportation of refined products and crude oil; | |
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changes in the supply of vessel capacity; and | |
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the
cost of retrofitting or modifying existing ships, as a result of
technological advances in vessel design or equipment, changes in
applicable environmental or other regulations or standards, or
otherwise.
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From time to time, we expect to enter
into agreements with Capital Maritime or other unaffiliated third parties to
purchase additional newbuildings or other vessels (or interests in vessel-owning
companies). Between the time we enter into an agreement for such
purchase and delivery of the vessel, the market value of similar vessels may
decline. The market value of vessels is influenced by the ability of
buyers to access bank finance and equity capital and any disruptions to the
market and the possible lack of adequate available finance may negatively affect
such market values. Despite a decline in market values we would still
be required to purchase the vessel at the agreed-upon price.
If we sell a vessel at a time when the
market value of our vessels has fallen, the sale may be at less than the
vessel’s carrying amount, resulting in a loss. In addition, a decrease in the
future charter rate and/or market value of our vessels could potentially result
in an impairment charge. A decline in the market value of our vessels could also
lead to a default under any prospective credit facility to which we become a
party, affect our ability to refinance our existing credit facilities and/or
limit our ability to obtain additional financing.
Spot
market rates for tanker vessels are highly volatile and are currently at
relatively low levels historically and may further decrease in the
future, which may adversely affect our earnings and ability to make cash
distributions in the event that our vessels are chartered in the spot
market.
We
currently charter one vessel in the spot market. In addition, the charters of
eight of our 18 vessels are scheduled to expire during 2010. If we cannot obtain
favorable medium- or long term charters for these vessels we may have to deploy
these vessels in the spot market in which case we will be exposed to the
cyclicality and volatility of the spot charter market. Although spot chartering
is common in the tanker industry, tanker charter hire rates are highly volatile
and may fluctuate significantly based upon demand for seaborne transportation of
crude oil and oil products as well as tanker supply. The world oil demand is
influenced by many factors, including international economic activity;
geographic changes in oil production, processing, and consumption; oil price
levels; inventory policies of the major oil and oil trading companies; and
strategic inventory policies of countries such as the United States and China.
The successful operation of our vessels in the spot charter market depends upon,
among other things, obtaining profitable spot charters and minimizing, to the
extent possible, time spent waiting for charters and time spent traveling
unladen to pick up cargo. Furthermore, as charter rates for spot charters are
fixed for a single voyage which may last up to several weeks, during periods in
which spot charter rates are rising, we will generally experience delays in
realizing the benefits from such increases.
The spot market is highly volatile,
and, in the past, there have been periods when spot rates have declined below
the operating cost of vessels. Currently charterhire rates are at relatively low
rates historically and there is no assurance that the tanker charter market will
recover over the next several months or will not continue to decline further. If
future spot charter rates decline, we may be unable to operate our vessels
trading in the spot market profitably, meet our obligations, including payments
on indebtedness, or to make cash distributions.
An
over-supply of tanker vessel capacity may lead to reductions in charterhire
rates and profitability.
The market supply of tanker vessels has
been increasing as a result of the delivery of substantial newbuilding orders
over the last few years, which, based on the current order book, is expected to
continue during 2010 and into 2011. Newbuildings were delivered in significant
numbers starting at the beginning of 2006 and continued to be delivered in
significant numbers through 2007, 2008, and 2009. In addition, the rate of
newbuilding supply might accelerate in 2010. An oversupply of tanker vessel
capacity may result in a further reduction of charterhire rates. If such a
further reduction occurs, we may only be able to recharter our vessels at
reduced or unprofitable rates as their current charters expire, or we may not be
able to charter these vessels at all. The occurrence of these events could have
a material adverse effect on our business, results of operations, cash flows,
financial condition and ability to make cash distributions.
We
must make substantial capital expenditures to maintain the operating capacity of
our fleet, which will reduce our cash available for distribution. In addition,
each quarter our board of directors is required to deduct estimated maintenance
and replacement capital expenditures from operating surplus, which may result in
less cash available to unitholders than if actual maintenance and replacement
capital expenditures were deducted.
We must
make substantial capital expenditures to maintain, over the long term, the
operating capacity of our fleet. These maintenance and replacement capital
expenditures include capital expenditures associated with drydocking a vessel,
modifying an existing vessel or acquiring a new vessel to the extent these
expenditures are incurred to maintain the operating capacity of our fleet. These
expenditures could increase as a result of changes in:
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the
cost of our labor and materials;
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the
cost and replacement life of suitable replacement
vessels;
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customer/market
requirements;
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increases
in the size of our fleet;
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the
age of the vessels in our fleet;
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charter
rates in the market; and
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governmental
regulations, industry and maritime self-regulatory organization standards
relating to safety, security or the
environment.
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Our significant maintenance and
replacement capital expenditures will reduce the amount of cash we have
available for distribution to our unitholders. Any costs associated with
scheduled drydocking are included in a fixed daily fee per time chartered
vessel, that we pay Capital Ship Management under a management agreement, for an
initial term of approximately five years from the time we take delivery of each
vessel, which includes the expenses for its next scheduled special or
intermediate survey, as applicable. In the event our management agreement is not
renewed or is materially amended, we may have to separately deduct estimated
capital expenditures associated with drydocking from our operating surplus in
addition to estimated replacement capital expenditures.
Our partnership agreement requires our
board of directors to deduct estimated, rather than actual, maintenance and
replacement capital expenditures from operating surplus each quarter in an
effort to reduce fluctuations in operating surplus. The amount of estimated
capital expenditures deducted from operating surplus is subject to review and
change by the conflicts committee at least once a year. In years when estimated
capital expenditures are higher than actual capital expenditures, the amount of
cash available for distribution to unitholders will be lower than if actual
capital expenditures were deducted from operating surplus. If our board of
directors underestimates the appropriate level of estimated maintenance and
replacement capital expenditures, we may have less cash available for
distribution in future periods when actual capital expenditures exceed our
previous estimates.
If
Capital Maritime or any third party seller we may contract with in the future
for the purchase of newbuildings fails to make construction payments for such
vessels, the shipyard may rescind the purchase contract and we may lose access
to such vessels or need to finance such vessels before they begin operating,
which could harm our business and our ability to make cash
distributions.
The seven newbuildings we have acquired
since our initial public offering (the “IPO”) were contracted directly by
Capital Maritime and all costs for the construction and delivery of such
vessels were incurred by Capital Maritime. In the future, we may enter into
similar arrangements with Capital Maritime or other third parties for the
acquisition of newbuildings. If Capital Maritime or any third party sellers we
contract with in the future fail to make construction payments for the
newbuildings after receiving notice by the shipbuilder following nonpayment on
any installment due date, the shipbuilder could rescind the newbuilding purchase
contract. As a result of such default, Capital Maritime or the third party
seller could lose all or part of the installment payments made prior to such
default, and we could either lose access to such newbuilding or any future
vessels we contract to acquire or may need to finance such vessels before they
begin operating and generating voyage revenues, which could harm our business
and reduce our ability to make cash distributions.
If
we finance the purchase of vessels through cash from operations, by increasing
our indebtedness or by issuing debt or equity securities, our ability
to make cash distributions may be diminished, our financial leverage could
increase or our unitholders could be diluted. In addition, if we expand the size
of our fleet by directly contracting newbuildings, we generally will be required
to make significant installment payments for such acquisitions prior to their
delivery and generation of revenue.
The
actual cost of a new product or crude oil tanker varies significantly depending
on the market price charged by shipyards, the size and specifications of the
vessel, whether a charter is attached to the vessel and the terms of such
charter, governmental regulations and maritime self-regulatory organization
standards. The total delivered cost of a vessel will be higher and include
financing, construction supervision, vessel start-up and other
costs.
To date, all the newbuildings we have
acquired have been contracted directly by Capital Maritime and all costs for the
construction and delivery of these vessels have been incurred by Capital
Maritime. As of December 31, 2009, our fleet consisted of 18 vessels, only seven
of which had been part of our initial fleet at the time of our IPO. We have
financed the purchase of the additional vessels either with debt, or partly with
debt, cash and partly by issuing additional equity securities. If we
issue additional common units or other equity securities, our existing
unitholders’ ownership
interest in us will be diluted. Please read “—We may issue additional equity
securities without your approval, which would dilute your ownership interest”
below.
If we elect to expand our fleet in the
future by entering into contracts for newbuildings directly with shipyards, we
generally will be required to make installment payments prior to their delivery.
We typically must pay 5% to 25% of the purchase price of a vessel upon signing
the purchase contract, even though delivery of the completed vessel will not
occur until much later (approximately 18-36 months later for current orders)
which could reduce cash available for distributions to unitholders. If we
finance these acquisition costs by issuing debt or equity securities, we will
increase the aggregate amount of interest payments or quarterly distributions we
must make prior to generating cash from the operation of the
newbuilding.
To fund the acquisition price of any
additional vessels we may contract to purchase from Capital Maritime or other
third parties and other related capital expenditures, we will be required to use
cash from operations or incur borrowings or raise capital through the sale of
debt or additional equity securities. Use of cash from operations will reduce
cash available for distributions to unitholders. Even if we are successful in
obtaining necessary funds, the terms of such financings could limit our ability
to pay cash distributions to unitholders. Incurring additional debt may
significantly increase our interest expense and financial leverage, and issuing
additional equity securities may result in significant unitholder dilution and
would increase the aggregate amount of cash required to meet our quarterly
distributions to unitholders, which could have a material adverse effect on our
ability to make cash distributions.
Our
ability to obtain bank financing and/or to access the capital markets for future
equity offerings may be limited by prevailing economic conditions. The
restrictions imposed by our credit facilities may also limit our ability to
access such financing, even if it is available. If we are unable to obtain
financing or access the capital markets, we may be unable to complete any future
purchases of vessels from Capital Maritime or from third parties.
Given the
prevailing market and economic conditions, including today’s financial turmoil
affecting the world’s debt, credit and capital markets, the ability of banks and
credit institutions to finance new projects, including the acquisition of new
vessels in the future, is uncertain. In addition, our ability to obtain bank
financing or to access the capital markets for future offerings may be limited
by our financial condition at the time of any such financing or offering, as
well as by the continuing adverse market conditions resulting from, among other
things, general economic conditions, weakness in the financial markets and
contingencies and uncertainties that are beyond our control. The restrictions
imposed by our credit facilities, including the obligation to comply with
certain asset maintenance and other ratios, may further restrict our ability to
access available financing. Our failure to obtain the funds for
necessary future capital expenditures could have a material adverse effect on
our business, results of operations and financial condition and on our ability
to make cash distributions. In addition to a major global economic slowdown, we
have been facing, and continue to face, a deterioration in the banking and
credit markets resulting in potentially higher interest costs and overall
limited availability of liquidity. As a result, the prevailing market and
economic conditions may affect our ability to complete any future purchases of vessels
from Capital Maritime or from third parties.
Our
debt levels may limit our flexibility in obtaining additional financing and in
pursuing other business opportunities.
We
entered into a $370.0 million revolving credit facility on March 22, 2007, as
amended, (our “existing credit facility”), and a further $350.0 million
revolving credit facility on March 19, 2008, as amended (our “new credit
facility” and together with our “existing credit facility”, our “credit
facilities”). As of December 31, 2009, we had drawn $366.5 million
under our existing credit facility and $107.5 million under our new credit
facility, and had $3.5 and $242.5 million available, respectively. For more
information regarding the terms of our credit facilities, please read “Item
5A—Operating
Results and Financial Review and Prospects—Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Borrowings—Revolving Credit
Facilities”. Our level of debt could have important consequences to us,
including the following:
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our
ability to obtain additional financing, if necessary, for working capital,
capital expenditures, acquisitions or other purposes may be impaired, or
such financing may not be available on favorable
terms;
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we
will need a substantial portion of our cash flow to make interest payments
and, following the end of the relevant non-amortizing periods, principal
payments on our debt, reducing the funds that would otherwise be available
for operations, future business opportunities and distributions to
unitholders;
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our
debt level will make us more vulnerable to competitive pressures, or to a
downturn in our business or in the economy in general, than our
competitors with less debt; and
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our
debt level may limit our flexibility in responding to changing business
and economic conditions.
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Our
ability to service our debt will depend upon, among other things, our future
financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors, some
of which are beyond our control. If our operating results are not sufficient to
service our current or future indebtedness, we may be forced to take actions
such as reducing or eliminating distributions, reducing or delaying
our business activities, acquisitions, investments or capital expenditures,
selling assets, restructuring or refinancing our debt, or seeking additional
equity capital or bankruptcy protection. We may not be able to effect any of
these remedies on satisfactory terms, or at all.
Our
credit facilities contain, and we expect that any future credit facilities we
may enter into will contain, restrictive covenants, which may limit our business
and financing activities, including our ability to make
distributions.
The
operating and financial restrictions and covenants in our credit facilities and
in any future credit facility we enter into could adversely affect our ability
to finance future operations or capital needs or to engage, expand or pursue our
business activities. For example, our credit facilities require the consent of
our lenders to, or limit our ability to, among other items:
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incur
or guarantee indebtedness;
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charge,
pledge or encumber the vessels;
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change
the flag, class, management or ownership of our
vessels;
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change
the commercial and technical management of our
vessels;
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sell
or change the beneficial ownership or control of our vessels;
and
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subordinate
our obligations thereunder to any general and administrative costs
relating to the vessels, including the fixed daily fee payable under the
management agreement.
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Our credit facilities also require us
to comply with the ISM Code and to maintain valid safety management certificates
and documents of compliance at all times.
In addition, effective for a three year
period from the end of June 2009 to the end of June 2012, our amended credit
facilities require us to:
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maintain
minimum free consolidated liquidity (50% of which may be in the form of
undrawn commitments under the relevant credit facility) of at least
$500,000 per financed vessel;
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maintain
a ratio of EBITDA (as defined in each credit facility) to interest expense
of at least 2.00 to 1.00 on a trailing four-quarter basis;
and
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maintain
a ratio of net Total Indebtedness to the aggregate Fair Market Value (as
defined in each credit facility) of our total fleet, current or future, of
no more than 0.80 (the “leverage
ratio”).
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We
are also required to maintain an aggregate fair market value of our
financed vessels equal to at least 125% of the aggregate amount
outstanding under each credit facility (the “collateral
maintenance”).
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The interest margin of our credit
facilities will increase from 1.35% to 1.45% over LIBOR subject to the level of
the leverage ratio and the collateral maintenance.
If
we are in breach of any of the terms of our credit facilities, as amended, a
significant portion of our obligations may become immediately due and payable,
and our lenders; commitment to make further loans to us may terminate. We may
also be unable to perform our business strategy.
Our
ability to comply with the covenants and restrictions contained in our credit
facilities and any other debt instruments we may enter into in the future may be
affected by events beyond our control, including prevailing economic, financial
and industry conditions. If market or other economic conditions deteriorate
further, our ability to comply with these covenants may be impaired. If we are
in breach of any of the restrictions, covenants, ratios or tests in our credit
facilities, especially if we trigger a cross-default currently contained in our
credit facilities or any interest rate swap agreements we have entered into
pursuant to their terms, a significant portion of our obligations may become
immediately due and payable, and our lenders’ commitment to make further loans
to us may terminate. We may not be able to reach agreement with our lenders to
amend the terms of the loan agreements or waive any breaches and we may not
have, or be able to obtain, sufficient funds to make any accelerated payments.
In addition, obligations under our credit facilities are secured by our vessels,
and if we are unable to repay debt under the credit facilities, the lenders
could seek to foreclose on those assets. Furthermore, if funds under our credit
facilities become unavailable as a result of a breach of our covenants or
otherwise, we may not be able to perform our business strategy which could have
a material adverse effect on our business, results of operations and financial
condition and our ability to make cash distributions.
Decreases
in asset values due to circumstances outside of our control may limit our
ability to make further draw-downs under our credit facilities which may limit
our ability to purchase additional vessels in the future. In addition, if asset
values continue to decrease significantly, we may have to pre-pay part of our
outstanding debt in order to remain in compliance with covenants under our
credit facilities.
Our
credit facilities require that we maintain an aggregate fair market value of the
vessels in our fleet at least 125% of the aggregate amount outstanding under
each credit facility. Any contemplated vessel acquisitions will have
to be at levels that do not impair the required ratios. The current severe
economic slowdown has had an adverse effect on tanker asset values which is
likely to persist if the economic slowdown continues. If the estimated asset
values of the vessels in our fleet continue to decrease, such decreases may
limit the amounts we can drawdown under our credit facilities to purchase
additional vessels and our ability to expand our fleet. In addition, we may be
obligated to pre-pay part of our outstanding debt in order to remain in
compliance with the relevant covenants in our credit facilities. As a result,
such decreases could have a material adverse effect on our business, results of
operations and financial condition and our ability to make cash
distributions.
Over
time, the value of our vessels may decline, which could adversely affect our
operating results.
Vessel
values for tankers can fluctuate substantially over time due to a number of
different factors. Vessel values may decline substantially from existing levels.
If operation of a vessel is not profitable, or if we cannot re-deploy a
chartered vessel at attractive rates upon charter termination, rather than
continue to incur costs to maintain and finance the vessel, we may seek to
dispose of it. Our inability to dispose of the vessel at a reasonable value
could result in a loss on its sale and adversely affect our results of
operations and financial condition. Further, if we determine at any time that a
vessel’s future useful life and earnings require us to impair its value on our
financial statements, we may need to recognize a significant charge against our
earnings.
Restrictions
in our debt agreements may prevent us from paying distributions.
Our
payment of interest and, following the end of the relevant non-amortizing
periods, principal on our debt will reduce cash available for distribution on
our units. In addition, our credit facilities prohibit the payment of
distributions if we are not in compliance with certain financial covenants
or upon the occurrence of an event of default or if the fair market
value of the vessels in our fleet is less than 125% of the aggregate amount
outstanding under each of our credit facilities.
Events of default under our credit
facilities include:
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failure
to pay principal or interest when
due;
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breach
of certain undertakings, negative covenants and financial covenants
contained in the credit facility, any related security document or
guarantee or the interest rate swap agreements, including failure to
maintain unencumbered title to any of the vessel-owning subsidiaries or
any of the assets of the vessel-owning subsidiaries and failure to
maintain proper insurance;
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any
breach of the credit facility, any related security document or guarantee
or the interest rate swap agreements (other than breaches described in the
preceding two bullet points) if, in the opinion of the lenders, such
default is capable of remedy and continues unremedied for 20 days after
written notice of the lenders;
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any
representation, warranty or statement made by us in the credit facility or
any drawdown notice thereunder or related security document or guarantee
or the interest rate swap agreements is untrue or misleading when
made;
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a
cross-default of our other indebtedness of $5.0 million or greater or of
the indebtedness of our subsidiaries of $750,000 or
greater;
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we
become, in the reasonable opinion of the lenders, unable to pay our debts
when due;
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any
of our or our subsidiaries’ assets are subject to any form of execution,
attachment, arrest, sequestration or distress in respect of a sum of $1.0
million or more that is not discharged within 10 business
days;
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an
event of insolvency or bankruptcy;
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cessation
or suspension of our business or of a material part
thereof;
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unlawfulness,
non-effectiveness or repudiation of any material provision of our credit
facility, of any of the related finance and guarantee documents or of our
interest rate swap agreements;
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failure
of effectiveness of security documents or
guarantee;
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the
common units cease to be listed on the Nasdaq Global Market or on any
other recognized securities
exchange;
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any
breach under any provisions contained in our interest rate swap
agreements;
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termination
of our interest rate swap agreements or an event of default thereunder
that is not remedied within five business
days;
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invalidity
of a security document in any material respect or if any security document
ceases to provide a perfected first priority security interest;
or
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any
other event that occurs or circumstance that arises in light of which the
lenders reasonably consider that there is a significant risk that we will
be unable to discharge our liabilities under the credit facility, related
security and guarantee documents or interest rate swap
agreements.
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We
anticipate that any subsequent refinancing of our current debt or any new debt
could have similar or more onerous restrictions. For more information regarding
our financing arrangements, please read “Item 5A: Operating and Financial Review
and Prospects —Management’s Discussion and Analysis of Financial Condition and
Results of Operations”.
Disruptions
in world financial markets and the resulting governmental action in the United
States and in other parts of the world could have a material adverse impact on
our results of operations, financial condition and cash flows, and could cause
the market price of our common units to decline.
In 2008
and 2009, global financial markets have experienced extraordinary disruption and
volatility following adverse changes in the global credit markets. The credit
markets in the United States have experienced significant contraction,
deleveraging and reduced liquidity, and governments around the world have taken
highly significant measures in response to such events, including the enactment
of the Emergency Economic Stabilization Act of 2008 in the United States, and
may implement other significant responses in the future. Securities and futures
markets and the credit markets are subject to comprehensive statutes,
regulations and other requirements. The SEC, other regulators, self-regulatory
organizations and exchanges have enacted temporary emergency regulations and may
take other extraordinary actions in the event of market emergencies and may
effect permanent changes in law or interpretations of existing laws. A
number of financial institutions have experienced serious financial difficulties
and, in some cases, have entered into bankruptcy proceedings or are in
regulatory enforcement actions. These difficulties have resulted, in part, from
declining markets for assets held by such institutions, particularly the
reduction in the value of their mortgage and asset-backed securities portfolios.
These difficulties have been compounded by a general decline in the willingness
by banks and other financial institutions to extend credit. In addition, these
difficulties may adversely affect the financial institutions that provide our
credit facilities and may impair their ability to continue to perform under
their financing obligations to us, which could have an impact on our ability to
fund current and future obligations.
We
currently derive all of our revenues from a limited number of customers, and the
loss of any customer or charter or vessel could result in a significant loss of
revenues and cash flow.
We have
derived, and believe that we will continue to derive, all of our revenues and
cash flow from a limited number of customers. For the year ended December 31,
2009, BP Shipping Limited, Morgan Stanley Capital Group Inc. and subsidiaries of
Overseas Shipholding Group Inc accounted for 59%, 22% and 12% of our
revenues, respectively. For the year ended December 31, 2008 BP Shipping Limited
and Morgan Stanley Capital Group Inc., accounted for 54% and 33%,
respectively. For the year ended December 31, 2007 they accounted for
58% and 24%, respectively. We currently have five principal
customers. We could lose a customer or the benefits of some or all of a charter
if:
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the
customer faces financial difficulties forcing it to declare bankruptcy or
making it impossible for it to perform its obligations under the charter,
including the payment of the agreed rates in a timely
manner;
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the
customer fails to make charter payments because of its financial
inability, disagreements with us or
otherwise;
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the
customer tries to re-negotiate the terms of the charter agreement due to
prevailing economic and market
conditions;
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the
customer exercises certain rights to terminate the charter or purchase the
vessel;
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the
customer terminates the charter because we fail to deliver the vessel
within a fixed period of time, the vessel is lost or damaged beyond
repair, there are serious deficiencies in the vessel or prolonged periods
of off-hire, or we default under the charter;
or
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a
prolonged force majeure event affecting the customer, including damage to
or destruction of relevant production facilities, war or political unrest
prevents us from performing services for that
customer.
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Please read “Item 4B: Business
Overview—Our Charters” below for further information on our
customers.
If we lose a key charter, we may be
unable to re-deploy the related vessel on terms as favorable to us due to the
long-term nature of most charters. If we are unable to re-deploy a vessel for
which the charter has been terminated, we will not receive any revenues from
that vessel, but we may be required to pay expenses necessary to maintain the
vessel in proper operating condition. Until such time as the vessel is
re-chartered, we may have to operate it in the spot market at charter rates
which may not be as favorable to us as our current charter rates. In addition,
if a customer exercises its right to purchase a vessel, we would not receive any
further revenue from the vessel and may be unable to obtain a substitute vessel
and charter. This may cause us to receive decreased revenue and cash flows from
having fewer vessels operating in our fleet. Any replacement newbuilding would
not generate revenues during its construction, and we may be unable to charter
any replacement vessel on terms as favorable to us as those of the terminated
charter. Any compensation under our charters for a purchase of the vessels may
not adequately compensate us for the loss of the vessel and related time
charter.
The loss of any of our customers, time
or bareboat charters or vessels, or a decline in payments under our charters,
could have a material adverse effect on our business, results of operations and
financial condition and our ability to make cash distributions.
Delays
in deliveries of newbuildings, our decision to cancel or our inability to
otherwise complete the acquisitions of any newbuildings we may decide to acquire
in the future, could harm our operating results and lead to the termination of
any related charters.
Any
newbuildings we may contract to acquire or order in the future could be delayed,
not completed or canceled, which would delay or eliminate our expected receipt
of revenues under any charters for such vessels. The shipbuilder or third party
seller could fail to deliver the newbuilding vessel or any other vessels we
acquire or order as may be agreed, or Capital Maritime, or relevant third party,
could cancel a purchase or a newbuilding contract because the shipbuilder has
not met its obligations, including its obligation to maintain agreed refund
guarantees in place for our benefit. For prolonged delays, the customer may
terminate the time charter.
Our receipt of newbuildings could be
delayed, canceled, or otherwise not completed because of:
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quality
or engineering problems;
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changes
in governmental regulations or maritime self-regulatory organization
standards;
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work
stoppages or other labor disturbances at the
shipyard;
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bankruptcy
or other financial or liquidity problems of the
shipbuilder;
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a
backlog of orders at the shipyard;
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political
or economic disturbances in the country or region where the vessel is
being built;
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weather
interference or catastrophic event, such as a major earthquake or
fire;
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the
shipbuilder failing to deliver the vessel in accordance with our vessel
specifications;
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our
requests for changes to the original vessel
specifications;
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shortages
of or delays in the receipt of necessary construction materials, such as
steel;
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our
inability to finance the purchase of the
vessel;
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a
deterioration in Capital Maritime’s relations with the relevant
shipbuilder; or
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our
inability to obtain requisite permits or
approvals.
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If
delivery of any vessel we contract to acquire in the future is materially
delayed, it could adversely affect our results of operations and financial
condition and our ability to make cash distributions.
We
depend on Capital Maritime and its affiliates to assist us in operating and
expanding our business.
Pursuant
to a management agreement and an administrative services agreement between us
and Capital Ship Management, Capital Ship Management provides significant
commercial and technical management services (including the commercial and
technical management of our vessels, class certifications, vessel maintenance
and crewing, purchasing and insurance and shipyard supervision) as well as
administrative, financial and other support services to us. Please read “Item
7B: Related-Party Transactions—Management Agreement” and “—Administrative
Services Agreement” below. Our operational success and ability to execute our
growth strategy will depend significantly upon Capital Ship Management’s
satisfactory performance of these services. Our business will be harmed if
Capital Ship Management fails to perform these services satisfactorily, if
Capital Ship Management cancels or materially amends either of these agreements,
or if Capital Ship Management stops providing these services to us.
In January 2010, we rechartered two
tanker vessels with subsidiaries of Capital Maritime. The performance of each
charter is guaranteed by Capital Maritime. In the future we may enter into
additional contracts with Capital Maritime to charter our vessels as they become
available for rechartering. We may also contract with Capital Maritime for it to
have newbuildings constructed on our behalf and to incur the
construction-related financing and we would purchase the vessels on or after
delivery based on an agreed-upon price. If Capital Maritime defaults under any
charter or does not perform its obligations under any contract we enter into, it
could have a material adverse effect on our business, results of operations and
financial condition and our ability to make cash distributions.
Our ability to enter into new charters
and expand our customer relationships will depend largely on our ability to
leverage our relationship with Capital Maritime and its reputation and
relationships in the shipping industry, including its ability to qualify for
long term business with certain oil majors. If Capital Maritime suffers material
damage to its reputation or relationships, it may harm our ability
to:
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renew
existing charters upon their
expiration;
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obtain
new charters;
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successfully
interact with shipyards during periods of shipyard construction
constraints;
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obtain
financing on commercially acceptable terms;
or
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maintain
satisfactory relationships with suppliers and other third
parties.
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If our ability to do any of the things
described above is impaired, it could have a material adverse effect on our
business, results of operations and financial condition and our ability to make
cash distributions.
Our
growth depends on continued growth in demand for refined products and crude oil
and the continued demand for seaborne transportation of refined products and
crude oil.
Our
growth strategy focuses on expansion in the refined product tanker and crude oil
shipping sector. Accordingly, our growth depends on continued growth in world
and regional demand for refined products and crude oil and the transportation of
refined products and crude oil by sea, which could be negatively affected by a
number of factors, including:
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the
economic and financial developments globally, including actual and
projected global economic growth.
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fluctuations
in the actual or projected price of refined products and crude
oil;
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refining
capacity and its geographical
location;
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increases
in the production of oil in areas linked by pipelines to consuming areas,
the extension of existing, or the development of new, pipeline systems in
markets we may serve, or the conversion of existing non-oil pipelines to
oil pipelines in those markets;
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decreases
in the consumption of oil due to increases in its price relative to other
energy sources, other factors making consumption of oil less attractive or
energy conservation measures;
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availability
of new, alternative energy sources;
and
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negative
or deteriorating global or regional economic or political conditions,
particularly in oil consuming regions, which could reduce energy
consumption or its growth.
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The refining industry may respond to
the economic downturn and demand weakness by reducing operating rates and by
reducing or cancelling certain investment expansion plans, including plans
for additional refining capacity. Continued reduced demand for refined products
and crude oil and the shipping of refined products or crude oil or the increased
availability of pipelines used to transport refined products or crude oil, would
have a material adverse effect on our future growth and could harm our business,
results of operations and financial condition.
Our
growth depends on our ability to expand relationships with existing customers
and obtain new customers, for which we will face substantial
competition.
Medium-
to long-term time charters and bareboat charters have the potential to provide
income at pre-determined rates over more extended periods of time. However, the
process for obtaining longer term time charters and bareboat charters is highly
competitive and generally involves a lengthy, intensive and continuous screening
and vetting process and the submission of competitive bids that often extends
for several months. In addition to the quality, age and suitability of the
vessel, longer term shipping contracts tend to be awarded based upon a variety
of other factors relating to the vessel operator further described below under
“Our vessels’ present and future employment could be adversely affected by an
inability to clear the oil majors’ risk assessment process”.
In addition to having to meet the
stringent requirements set out by charterers, it is likely that we will also
face substantial competition from a number of competitors who may have greater
financial resources, stronger reputation or experience than we do when we try to
recharter our vessels. It is also likely that we will face increased numbers of
competitors entering into our transportation sectors, including in the ice class
sector. Increased competition may cause greater price competition, especially
for medium- to long-term charters.
As a result of these factors, we may be
unable to expand our relationships with existing customers or obtain new
customers for medium- to long-term time charters or bareboat charters on a
profitable basis, if at all. Even if we are successful in employing our vessels
under longer term time charters or bareboat charters, our vessels will not be
available for trading in the spot market during an upturn in the tanker market
cycle, when spot trading may be more profitable. If we cannot successfully
employ our vessels in profitable time charters our results of operations and
operating cash flow could be adversely affected.
Our
vessels’ present and future employment could be adversely affected by an
inability to clear the oil majors’ risk assessment process.
Shipping,
and especially crude oil, refined product and chemical tankers have been, and
will remain, heavily regulated. The so called “oil majors” companies, together
with a number of commodities traders, represent a significant percentage of the
production, trading and shipping logistics (terminals) of crude oil and refined
products worldwide. Concerns for the environment have led the oil majors to
develop and implement a strict ongoing due diligence process when selecting
their commercial partners. This vetting process has evolved into a sophisticated
and comprehensive risk assessment of both the vessel operator and the vessel,
including physical ship inspections, completion of vessel inspection
questionnaires performed by accredited inspectors and the production of
comprehensive risk assessment reports. In the case of term charter
relationships, additional factors are considered when awarding such contracts,
including:
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office
assessments and audits of the vessel
operator;
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the
operator’s environmental, health and safety
record;
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compliance
with the standards of the International Maritime Organization (the “IMO”),
a United Nations agency that issues international trade standards for
shipping;
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compliance
with heightened industry standards that have been set by several oil
companies;
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shipping
industry relationships, reputation for customer service, technical and
operating expertise;
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shipping
experience and quality of ship operations, including
cost-effectiveness;
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quality,
experience and technical capability of
crews;
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the
ability to finance vessels at competitive rates and overall financial
stability;
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relationships
with shipyards and the ability to obtain suitable
berths;
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construction
management experience, including the ability to procure on-time delivery
of new vessels according to customer
specifications;
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willingness
to accept operational risks pursuant to the charter, such as allowing
termination of the charter for force majeure events;
and
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competitiveness
of the bid in terms of overall
price.
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Should
Capital Maritime and Capital Ship Management not continue to successfully clear
the oil majors’ risk assessment processes on an ongoing basis, our vessels’
present and future employment as well as our relationship with our existing
charterers and our ability to obtain new charterers, whether medium- or
long-term, could be adversely affected. Such a situation may lead to the oil
majors’ terminating existing charters and refusing to use our vessels in the
future which would adversely affect our results of operations and cash flows.
Please read “Item 4B: Business Overview—Major Oil Company Vetting Process” for
more information regarding this process.
We
may be unable to make or realize expected benefits from acquisitions, and
implementing our growth strategy through acquisitions may harm our business,
financial condition and operating results.
Our
growth strategy focuses on a gradual expansion of our fleet. Any acquisition of
a vessel may not be profitable to us at or after the time we acquire it and may
not generate cash flow sufficient to justify our investment. In addition, our
growth strategy exposes us to risks that may harm our business, financial
condition and operating results, including risks that we, or Capital Ship
Management, our manager, as the case may be, may:
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fail
to realize anticipated benefits, such as new customer relationships,
cost-savings or cash flow
enhancements;
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be
unable to hire, train or retain qualified shore and seafaring personnel to
manage and operate our growing business and
fleet;
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decrease
our liquidity by using a significant portion of our available cash or
borrowing capacity to finance
acquisitions;
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significantly
increase our interest expense or financial leverage if we incur additional
debt to finance acquisitions;
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fail
to meet the covenants under our loans regarding the fair market value of
our vessels;
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incur
or assume unanticipated liabilities, losses or costs associated with the
business or vessels acquired; or
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incur
other significant charges, such as impairment of goodwill or other
intangible assets, asset devaluation or restructuring
charges.
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Unlike
newbuildings, existing vessels typically do not carry warranties as to their
condition. While we generally inspect existing vessels prior to purchase, such
an inspection would normally not provide us with as much knowledge of a vessel’s
condition as we would possess if it had been built for us and operated by us
during its life. Repairs and maintenance costs for existing vessels are
difficult to predict and may be substantially higher than for vessels we have
operated since they were built. These costs could decrease our cash flow and
reduce our liquidity.
The
vessels that currently make up our fleet, as well as the remaining vessels we
may purchase from Capital Maritime under our omnibus agreement, have been, or
will be, built in accordance with custom designs from three different shipyards,
and the vessels from each respective shipyard are the same in all material
respects. As a result, any latent defect discovered in one vessel will likely
affect all of our vessels.
The
vessels that make up our fleet, with the exception of the M/T Amore Mio II, as
well as certain sister vessels in Capital Maritime’s fleet for which we have
been granted a right of first offer, are, or will be, based on standard designs
from Hyundai MIPO Dockyard Co., Ltd., South Korea, STX Shipbuilding Co., Ltd.,
South Korea and Baima Shipyard, China, and have been customized by Capital
Maritime, in some cases in consultation with the charterers of the vessel, and
are, or will be, uniform in all material respects. All vessels have the same or
similar equipment. As a result, any latent design defect discovered in one of
our vessels will likely affect all of our other vessels in that class. As a
result, any equipment defect discovered may affect all of our vessels. Any
disruptions in the operation of our vessels resulting from defects could
adversely affect our receipt of revenues under the charters for the vessels
affected.
Certain
design features in our vessels have been modified by Capital Maritime to enhance
the commercial capability of our vessels and have not all yet been tested. As a
result, we may encounter unforeseen expenses, complications, delays and other
unknown factors which could adversely affect our revenues.
Capital Maritime has modified certain
design features in our vessels which have not yet been tested and as a result,
they may not operate as intended. If these modifications fail to enhance the
commercial capability of our vessels as intended or interfere with the operation
of our vessels, we could face expensive and time-consuming design modifications,
delays in the operation of our vessels, damaged customer relationships and harm
to our reputation. Any disruptions in the operation of our vessels resulting
from the design modifications could adversely affect our receipt of revenues
under the charters for the vessels affected.
Acts
of piracy on ocean-going vessels have recently increased in frequency, which
could adversely affect our business.
Acts of
piracy have historically affected ocean-going vessels trading in regions of the
world such as the South China Sea and in the Gulf of Aden off the coast of
Somalia. Throughout 2008 and 2009, the frequency of piracy incidents increased
significantly, particularly in the Gulf of Aden off the coast of Somalia. If
these piracy attacks result in regions in which our vessels are deployed being
characterized by insurers as “war risk” zones, as the Gulf of Aden temporarily
was in May 2008, or Joint War Committee (“JWC”) “war and strikes” listed areas,
premiums payable for insurance coverage for our vessels could increase
significantly and such insurance coverage may be more difficult to obtain. In
addition, crew costs, including costs which may be incurred to the extent we
employ onboard security guards, could increase in such circumstances. We may not
be adequately insured to cover losses from these incidents, which could have a
material adverse effect on us. In addition, detention hijacking as a result of
an act of piracy against our vessels, or an increase in cost, or unavailability
of insurance for our vessels, could have a material adverse impact on our
business, results of operations, cash flows, financial condition and ability to
make cash distributions.
In response to piracy incidents in 2008
and 2009, particularly in the Gulf of Aden off the coast of Somalia, following
consultation with regulatory authorities, we may station armed guards on some of
our vessels in some instances. While any use of guards would be intended to
deter and prevent the hijacking of our vessels, it could also increase our risk
of liability for death or injury to persons or damage to personal property. If
we do not have adequate insurance in place to cover such liability, it could
adversely impact our business, results of operations, cash flows, financial
condition and ability to make cash distributions.
Political
instability, terrorist or other attacks, war or international hostilities can
affect the tanker industry, which may adversely affect our
business.
We
conduct most of our operations outside of the United States, and our business,
results of operations, cash flows, financial condition and ability to make cash
distributions may be adversely affected by the effects of political instability,
terrorist or other attacks, war or international hostilities. Terrorist attacks
such as the attacks on the United States on September 11, 2001, the bombings in
Spain on March 11, 2004 and in London on July 7, 2005 and the continuing
response of the United States to these attacks, as well as the threat of future
terrorist attacks, continue to contribute to world economic instability and
uncertainty in global financial markets. Future terrorist attacks could result
in increased volatility of the financial markets in the United States and
globally and could result in an economic recession in the United States or the
world. These uncertainties could also adversely affect our ability to obtain
additional financing on terms acceptable to us or at all.
In the past, political instability has
also resulted in attacks on vessels, such as the attack on the M/T Limburg in
October 2002, mining of waterways and other efforts to disrupt international
shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy
have also affected vessels trading in regions such as the South China Sea and
the Gulf of Aden off the coast of Somalia. In addition, oil facilities,
shipyards, vessels, pipelines and oil and gas fields could be targets of future
terrorist attacks. Any such attacks could lead to, among other things, bodily
injury or loss of life, vessel or other property damage, increased vessel
operational costs, including insurance costs, and the inability to transport oil
and other refined products to or from certain locations. Any of these
occurrences or other events beyond our control that adversely affect the
distribution, production or transportation of oil and other refined products to
be shipped by us could entitle our customers to terminate our charter contracts
and could have a material adverse impact on our business, financial condition,
results of operations, cash flows and ability to make cash
distributions.
Compliance
with safety and other vessel requirements imposed by classification societies
may be costly and could reduce our cash flows and ability to make
distributions.
The hull
and machinery of every commercial vessel must be certified as being “in class”
by a classification society authorized by its country of registry. The
classification society certifies that a vessel is safe and seaworthy in
accordance with the applicable rules and regulations of the country of registry
of the vessel and the Safety of Life at Sea Convention.
A vessel must undergo annual surveys,
intermediate surveys and special surveys. In lieu of a special survey, a
vessel’s machinery may be placed on a continuous survey cycle, under which the
machinery would be surveyed periodically over a five-year period. We expect our
vessels to be on special survey cycles for hull inspection and continuous survey
cycles for machinery inspection. Every vessel is also required to be drydocked
every two to three years for inspection of its underwater parts.
If any vessel does not maintain its
class or fails any annual, intermediate or special survey, the vessel will be
unable to trade between ports and will be unemployable, which could have a
material adverse effect on our business, results of operations, cash flows,
financial condition and ability to make cash distributions.
Our
operations expose us to political and governmental instability, which could harm
our business.
Our operations may be adversely
affected by changing or adverse political and governmental conditions in the
countries where our vessels are flagged or registered and in the regions where
we otherwise engage in business. Any disruption caused by these factors may
interfere with the operation of our vessels, which could harm our business,
financial condition and results of operations. In particular, we derive a
substantial portion of our revenues from shipping oil and oil products from
politically unstable regions. Past political efforts to disrupt shipping in
these regions, particularly in the Arabian Gulf, have included attacks on ships
and mining of waterways. In addition to acts of terrorism, trading in this and
other regions has also been subject, in limited instances, to piracy. Our
operations may also be adversely affected by expropriation of vessels, taxes,
regulation, tariffs, trade embargoes, economic sanctions or a disruption of or
limit to trading activities, or other adverse events or circumstances in or
affecting the countries and regions where we operate or where we may operate in
the future.
Marine
transportation is inherently risky, and an incident involving significant loss
of, or environmental contamination by, any of our vessels could harm our
reputation and business.
Our vessels and their cargoes are at
risk of being damaged or lost because of events such as:
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marine
disasters;
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bad
weather;
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mechanical
failures;
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grounding,
fire, explosions and collisions;
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piracy;
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human
error; and
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war
and terrorism.
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An accident involving any of our
vessels could result in any of the following:
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environmental
damage, including potential liabilities or costs to recover any spilled
oil or other petroleum products and to restore the eco-system where the
spill occurred;
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death
or injury to persons, loss of
property;
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delays
in the delivery of cargo;
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loss
of revenues from or termination of charter
contracts;
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governmental
fines, penalties or restrictions on conducting
business;
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higher
insurance rates; and
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damage
to our reputation and customer relationships
generally.
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Any of these results could have a
material adverse effect on our business, financial condition and operating
results.
Our
insurance may be insufficient to cover losses that may occur to our property or
result from our operations.
The
operation of ocean-going vessels in international trade is inherently risky. All
risks may not be adequately insured against, and any particular claim may not be
paid. We do not currently maintain off-hire insurance, which would cover the
loss of revenue during extended vessel off-hire periods, such as those that
occur during an unscheduled drydocking due to damage to the vessel from
accidents. Accordingly, any extended vessel off-hire, due to an accident or
otherwise, could have a material adverse effect on our business and our ability
to pay distributions to our unitholders. Any claims covered by insurance would
be subject to deductibles, and since it is possible that a large number of
claims may be brought, the aggregate amount of these deductibles could be
material. Certain of our insurance coverage is maintained through mutual
protection and indemnity associations, and as a member of such associations we
may be required to make additional payments over and above budgeted premiums if
member claims exceed association reserves. Please read “—We will be subject to
funding calls by our protection and indemnity associations, and our associations
may not have enough resources to cover claims made against them”
below.
We may be unable to procure adequate
insurance coverage at commercially reasonable rates in the future. For example,
more stringent environmental regulations have led in the past to increased costs
for, and in the future may result in the lack of availability of, insurance
against risks of environmental damage or pollution. A catastrophic oil spill or
marine disaster could exceed our insurance coverage, which could harm our
business, financial condition and operating results. In addition, certain of our
vessels are under bareboat charters with BP Shipping Limited and subsidiaries of
Overseas Shipholding Group Inc. Under the terms of these charters, the charterer
provides for the insurance of the vessel and as a result these vessels may not
be adequately insured and/or in some cases may be self-insured. Any uninsured or
underinsured loss could harm our business and financial condition. In addition,
our insurance may be voidable by the insurers as a result of certain of our
actions, such as our ships failing to maintain certification with applicable
maritime self-regulatory organizations.
Changes in the insurance markets
attributable to terrorist attacks may also make certain types of insurance more
difficult for us to obtain. In addition, the insurance that may be available to
us may be significantly more expensive than our existing coverage.
We
will be subject to funding calls by our protection and indemnity associations,
and our associations may not have enough resources to cover claims made against
them.
We are
indemnified for legal liabilities incurred while operating our vessels through
membership in P&I Associations. P&I Associations are mutual insurance
associations whose members must contribute to cover losses sustained by other
association members. The objective of a P&I Association is to provide mutual
insurance based on the aggregate tonnage of a member’s vessels entered into the
association. Claims are paid through the aggregate premiums of all members of
the association, although members remain subject to calls for additional funds
if the aggregate premiums are insufficient to cover claims submitted to the
association. Claims submitted to the association may include those incurred by
members of the association, as well as claims submitted to the association from
other P&I Associations with which our P&I Association has entered into
interassociation agreements. The P&I Associations to which we belong may not
remain viable and we may become subject to additional funding calls
which could adversely affect us.
The
maritime transportation industry is subject to substantial environmental and
other regulations, which may significantly limit our operations or increase our
expenses.
Our operations are affected by
extensive and changing international, national and local environmental
protection laws, regulations, treaties, conventions and standards in force in
international waters, the jurisdictional waters of the countries in which our
vessels operate, as well as the countries of our vessels’ registration. Many of
these requirements are designed to reduce the risk of oil spills, air emissions
and other pollution, and to reduce potential negative environmental effects
associated with the maritime industry in general. In addition, we believe
that the heightened environmental, quality and security concerns of insurance
underwriters, regulators and charterers will lead to additional regulatory
requirements, including enhanced risk assessment and security requirements and
greater inspection and safety requirements on vessels. Our compliance with
these requirements can be costly.
These requirements can affect the
resale value or useful lives of our vessels, require a reduction in cargo
capacity, ship modifications or operational changes or restrictions, lead to
decreased availability of insurance coverage for environmental matters or result
in the denial of access to certain jurisdictional waters or ports, or detention
in certain ports. Under local, national and foreign laws, as well as
international treaties and conventions, we could incur material liabilities,
including cleanup obligations and natural resource damages, in the event that
there is a release of petroleum or other hazardous substances from our vessels
or otherwise in connection with our operations. We could also become subject to
personal injury or property damage claims relating to the release of or exposure
to hazardous materials associated with our current or historic operations.
Violations of or liabilities under environmental requirements also can result in
substantial penalties, fines and other sanctions, including, in certain
instances, seizure or detention of our vessels.
We could incur significant costs,
including cleanup costs, fines, penalties, third-party claims and natural
resource damages, as the result of an oil spill or other liabilities under
environmental laws. The United States Oil Pollution Act of 1990 (“OPA 90”)
affects all vessel owners shipping oil or petroleum products to, from or within
the United States. OPA 90 allows for potentially unlimited liability without
regard to fault of owners, operators and bareboat charterers of vessels for oil
pollution in U.S. waters. Similarly, the International Convention on Civil
Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by
most countries outside of the U.S., imposes liability for oil pollution in
international waters. OPA 90 expressly permits individual states to impose their
own liability regimes with regard to hazardous materials and oil pollution
incidents occurring within their boundaries. Coastal states in the U.S. have
enacted pollution prevention liability and response laws, many providing for
unlimited liability.
In addition to complying with existing
laws and regulations and those that may be adopted, shipowners may incur
significant additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for potential spills and in
obtaining insurance coverage. Government regulation of vessels, particularly in
the areas of safety and environmental requirements, can be expected to become
stricter in the future and require us to incur significant capital expenditure
on our vessels to keep them in compliance, or even to scrap or sell certain
vessels altogether. For example, amendments to revise the regulations of MARPOL
regarding the prevention of air pollution from ships were approved by the Marine
Environment Protection Committee (“MEPC”) and formally adopted at MEPC 58th
session held in October 2008. The amendments establish a series of progressive
standards to further limit the sulphur content in fuel oil, which would be
phased in through 2020, and new tiers of nitrogen oxide (“NOx”) emission
standards for new marine diesel engines, depending on their date of
installation. The amendments are expected to enter into force under
the tacit acceptance procedure in July 2010, or on some other date determined by
the MEPC. Additionally, more stringent emission standards could apply
in coastal areas designated, pursuant to the amendments, as Emission Control
Areas.
Further legislation, or amendments to
existing legislation, applicable to international and national maritime trade is
expected over the coming years relating to environmental matters, such as ship
recycling, sewage systems, emission control (including emissions of greenhouse
gases), ballast treatment and handling.
For example, legislation and
regulations that will require more stringent controls of air emissions from
ocean-going vessels are pending or have been approved at the federal and state
level in the U.S. The relevant standards are consistent with the 2008 Amendments
to Annex VI of MARPOL. Such legislation or regulations may require significant
additional capital expenditures (such as additional costs required for the
installation of control equipment on each vessel) or operating expenses (such as
increased costs for low-sulfur fuel) in order for us to maintain our vessels’
compliance with international and/or national regulations.
In addition, various jurisdictions,
including the IMO and the United States, have proposed or implemented
requirements governing the management of ballast water to prevent the
introduction of non-indigenous species considered to be invasive. The IMO has
adopted the International Convention for the Control and Management of Ships’
Ballast Water and Sediments (the “BWM Convention”), which calls for a phased
introduction of mandatory ballast water exchange requirements, to be replaced in
time with mandatory concentration limits. The BWM Convention will enter into
force 12 months after it has been adopted by 30 states, the combined merchant
fleets of which represent not less than 35% of the gross tonnage of the world’s
merchant shipping tonnage. As of December 31, 2009, 21 states, representing
approximately 22.3% of the world’s merchant shipping tonnage, have ratified the
BWM Convention. We may incur additional costs to install the relevant control
equipment on our vessels in order to comply with the new standards.
In the United States, ballast water
management legislation has been enacted in several states, and federal
legislation is currently pending in the U.S. Congress. In addition, the U.S.
Environmental Protection Agency has also adopted a rule which requires
commercial vessels to obtain a “Vessel General Permit” from the U.S. Coast Guard
in compliance with the Federal Water Pollution Control Act (the “Clean Water
Act”) regulating the discharge of ballast water and other discharges into U.S.
waters. Significant expenditures for the installation of additional equipment or
new systems on board our vessels may be required in order to comply with
existing or future regulations regarding ballast water management in these other
jurisdictions, along with the potential for increased port disposal
costs.
Other requirements may also come into
force regarding the protection of endangered species which could lead to changes
in the routes our vessels follow or in trading patterns generally and thus to
additional capital expenditures. Additionally, new environmental regulations
with respect to greenhouse gas emissions and preservation of biodiversity
amongst others, are expected to come into effect following the agreement and
execution of a G8 environmental agreement. The next meeting of the G8 to discuss
such matters is scheduled to take place in Canada in June 2010.
Furthermore, as a result of marine
accidents we believe that regulation of the shipping industry will continue to
become more stringent and more expensive for us and our competitors. In recent
years, the IMO and EU have both accelerated their existing non-double-hull
phase-out schedules in response to highly publicized oil spills and other
shipping incidents involving companies unrelated to us. Future incidents may
result in the adoption of even stricter laws and regulations, which could limit
our operations or our ability to do business and which could have a material
adverse effect on our business and financial results.
Please read “Item 4B: Business
Overview—Regulation” below for a more detailed discussion of the regulations
applicable to our vessels.
The
crew employment agreements manning agents enter into on behalf of Capital
Maritime or any of its affiliates, including Capital Ship Management, our
manager, may not prevent labor interruptions and the failure to renegotiate
these agreements successfully in the future may disrupt our operations and
adversely affect our cash flows.
The crew
employment agreements that manning agents enter into on behalf of Capital
Maritime or any of its affiliates, including Capital Ship Management, our
manager, may not prevent labor interruptions and are subject to renegotiation in
the future. Any labor interruptions, including due to a failure to renegotiate
employment agreements with our crew members successfully could disrupt our
operations and could adversely affect our business, financial condition and
results of operations.
Arrests
of our vessels by maritime claimants could cause a significant loss of earnings
for the related off-hire period.
Crew
members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien by “arresting” or “attaching” a vessel through
foreclosure proceedings. The arrest or attachment of one or more of our vessels
could result in a significant loss of earnings for the related off-hire period.
In addition, in jurisdictions where the “sister ship” theory of liability
applies, a claimant may arrest the vessel which is subject to the claimant’s
maritime lien and any “associated” vessel, which is any vessel owned or
controlled by the same owner. In countries with “sister ship” liability laws,
claims might be asserted against us or any of our vessels for liabilities of
other vessels that we own.
Risks
Inherent in an Investment in Us
Capital
Maritime and its affiliates may engage in competition with us.
Pursuant
to the omnibus agreement that we and Capital Maritime have entered into, Capital
Maritime and its controlled affiliates (other than us, our general partner and
our subsidiaries) have agreed not to acquire, own or operate medium- range
tankers under time charters of two or more years without the consent of our
general partner. The omnibus agreement, however, contains significant exceptions
that may allow Capital Maritime or any of its controlled affiliates to compete
with us, which could harm our business. Please read “Item 7B:
Related-Party Transactions—Omnibus Agreement—Noncompetition”.
Unitholders
have limited voting rights and our partnership agreement restricts the voting
rights of unitholders owning 5% or more of our units.
Holders
of common units have only limited voting rights on matters affecting our
business. We hold a meeting of the limited partners every year to elect one or
more members of our board of directors and to vote on any other matters that are
properly brought before the meeting. Common unitholders elect only four of the
seven members of our board of directors. The elected directors will be elected
on a staggered basis and will serve for three-year terms. Our general partner in
its sole discretion has the right to appoint the remaining three directors and
to set the terms for which those directors will serve. The partnership agreement
also contains provisions limiting the ability of unitholders to call meetings or
to acquire information about our operations, as well as other provisions
limiting the unitholders’ ability to influence the manner or direction of
management. Unitholders have no right to elect our general partner and our
general partner may not be removed except by a vote of the holders of at least
66⅔% of the outstanding units, including any units owned by our general partner
and its affiliates, voting together as a single class and a majority vote of our
board of directors.
Our partnership agreement further
restricts unitholders’ voting rights by providing that if any person or group,
other than our general partner, its affiliates, their transferees and persons
who acquired such units with the prior approval of our board of directors, owns
beneficially 5% or more of any class of units then outstanding, any such units
owned by that person or group in excess of 4.9% may not be voted on any matter
and will not be considered to be outstanding when sending notices of a meeting
of unitholders, calculating required votes, except for purposes of nominating a
person for election to our board, determining the presence of a quorum or for
other similar purposes, unless required by law. The voting rights of any such
unitholders in excess of 4.9% will be redistributed pro rata among the other
unitholders holding less than 4.9% of the voting power of all classes of units
entitled to vote. As an affiliate of our general partner, Capital Maritime is
not subject to this limitation. Capital Maritime owns a 46.6% interest in us,
including 11,304,651 common units and a 2% interest in us through its ownership
of our general partner
Our
general partner and its other affiliates own a controlling interest in us and
have conflicts of interest and limited fiduciary and contractual duties, which
may permit them to favor their own interests to your detriment.
Capital
Maritime currently owns a 46.6% interest in us, including 11,304,651 common
units and a 2% interest in us through its ownership of our general partner. The
common units owned by Capital Maritime have the same rights as our other
outstanding common units. Our general partner effectively controls our
day-to-day affairs consistent with policies and procedures adopted by and
subject to the direction of our board of directors. Our general partner and its
affiliates and our directors have a fiduciary duty to manage us in a manner
beneficial to us and our unitholders. However, the officers of our general
partner have a fiduciary duty to manage our general partner in a manner
beneficial to Capital Maritime. Furthermore, all of the officers of our general
partner and certain of our directors are directors or officers of Capital
Maritime and its affiliates, and as such they have fiduciary duties to Capital
Maritime that may cause them to pursue business strategies that
disproportionately benefit Capital Maritime or which otherwise are not in the
best interests of us or our unitholders. Conflicts of interest may arise between
Capital Maritime and its affiliates, including our general partner and its
officers, on the one hand, and us and our unitholders, on the other hand. As a
result of these conflicts, our general partner and its affiliates may favor
their own interests over the interests of our unitholders. Please read “—Our
partnership agreement limits the fiduciary duties of our general partner and our
directors to our unitholders and restricts the remedies available to unitholders
for actions taken by our general partner or our directors” below. These
conflicts include, among others, the following situations:
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neither
our partnership agreement nor any other agreement requires our general
partner or Capital Maritime or its affiliates to pursue a business
strategy that favors us or utilizes our assets, and Capital Maritime’s
officers and directors have a fiduciary duty to make decisions in the best
interests of the unitholders of Capital Maritime, which may be contrary to
our interests;
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the
executive officers of our general partner and three of our directors also
serve as executive officers and/or directors of Capital
Maritime;
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our
general partner and our board of directors are allowed to take into
account the interests of parties other than us, such as Capital Maritime,
in resolving conflicts of interest, which has the effect of limiting their
fiduciary duties to our
unitholders;
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our
general partner and our directors have limited their liabilities and
reduced their fiduciary duties under the laws of the Marshall Islands,
while also restricting the remedies available to our unitholders, and, as
a result of purchasing our units, unitholders are treated as having agreed
to the modified standard of fiduciary duties and to certain actions that
may be taken by our general partner and our directors, all as set forth in
the partnership agreement;
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our
general partner and our board of directors will be involved in determining
the amount and timing of our asset purchases and sales, capital
expenditures, borrowings, and issuances of additional partnership
securities and reserves, each of which can affect the amount of cash that
is available for distribution to our
unitholders;
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our
general partner may have substantial influence over our board of
directors’ decision to cause us to borrow funds in order to permit the
payment of cash distributions, even if the purpose or effect of the
borrowing is to make a distribution on any subordinated units or to make
incentive distributions;
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our
general partner is entitled to reimbursement of all reasonable costs
incurred by it and its affiliates for our
benefit;
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our
partnership agreement does not restrict us from paying our general partner
or its affiliates for any services rendered to us on terms that are fair
and reasonable or entering into additional contractual arrangements with
any of these entities on our behalf;
and
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our
general partner may exercise its right to call and purchase our
outstanding units if it and its affiliates own more than 80% of our common
units.
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Although a majority of our directors
will over time be elected by common unitholders, our general partner will likely
have substantial influence on decisions made by our board of directors. Please
read “Item 7B: Related-Party Transactions” below.
The
vote of a majority of our common unitholders is required to amend the terms of
our partnership agreement. Capital Maritime currently owns 45.6% of our common
units and can significantly impact any vote under the terms of our partnership
agreement which may allow Capital Maritime to favor its interests and may
significantly affect your rights under the partnership agreement. In addition,
Capital Maritime is not subject to the limitations on voting rights imposed on
our other limited partners.
On
January 30, 2009, we announced the payment of an exceptional non-recurring
distribution of $1.05 per unit for the fourth quarter of 2008, bringing annual
distributions to unitholders to $2.27 per unit for the year ended December 31,
2008, a level which under the terms of our partnership agreement resulted in the
early termination of the subordination period and the automatic conversion of
the subordinated units into common units. Following such conversion, Capital
Maritime owns a 46.6% interest in us, including 11,304,651common units and a 2%
interest in us through its ownership of our general partner. The common units
owned by Capital Maritime have the same rights as our other outstanding common
units.
A
majority of common units (or in certain cases a higher percentage), of which
Capital Maritime owns 45.6%, are required in order to amend the terms of the
partnership agreement or to reach certain decisions or actions,
including:
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amendments
to the definition of available cash, operating surplus, adjusted operating
surplus;
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changes
in our cash distribution policy;
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elimination
of the obligation to pay the minimum quarterly
distribution;
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elimination
of the obligation to hold an annual general
meeting;
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removal
of any appointed director for
cause;
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transfer
of the general partner interest;
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transfer
of the incentive distribution
rights;
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the
ability of the board to sell, exchange or otherwise dispose of all or
substantially all of our assets;
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resolution
of conflicts of interest;
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withdrawal
of the general partner;
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removal
of the general partner;
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dissolution
of the partnership;
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change
to the quorum requirements;
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approval
of merger or consolidation; and
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any
amendment to the partnership
agreement.
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In
addition, prior to the conversion of our subordinated units, any shortfall in
the payment of the minimum quarterly distribution was borne first by the owners
of the subordinated units. Following such conversion the risk will be borne only
by our common unitholders.
Our partnership agreement further
restricts unitholders’ voting rights by providing that if any person, other than
our general partner or its affiliates, their transferees and persons who acquire
units with the prior approval of our board of directors owns beneficially 5% or
more of any class of units then outstanding, any such units owned by that person
or group in excess of 4.9% may not be voted on any matter and that the voting
rights of any such unitholders in excess of 4.9% will be redistributed pro rata
among the other unitholders holding less than 4.9% of the voting power of all
classes of units entitled to vote. See “—Unitholders have limited voting rights
and our partnership agreement restricts the voting rights of unitholders owning
5% or more of our units” above for more information. As an affiliate of our
general partner, Capital Maritime is not subject to this limitation; and as our
largest unitholder, may propose amendments to the partnership agreement that may
favor its interests over other unitholders’ and which
may change or limit other unitholders’ rights under
the partnership agreement.
We
currently do not have any officers and rely, and expect to continue to rely,
solely on officers of our general partner, who face conflicts in the allocation
of their time to our business.
Our board
of directors has not exercised its power to appoint officers of Capital Product
Partners L.P. to date, and as a result, we rely, and expect to continue to rely,
solely on the officers of our general partner, who are not required to work
full-time on our affairs and who also work for affiliates of our general
partner, including Capital Maritime. For example, our general partner’s Chief
Executive Officer and Chief Financial Officer is also an executive officer of
Capital Maritime. The affiliates of our general partner conduct substantial
businesses and activities of their own in which we have no economic interest. As
a result, there could be material competition for the time and effort of the
officers of our general partner who also provide services to our general
partner’s affiliates, which could have a material adverse effect on our
business, results of operations and financial condition.
Our
partnership agreement limits our general partner’s and our directors’ fiduciary
duties to our unitholders and restricts the remedies available to unitholders
for actions taken by our general partner or our directors.
Our
partnership agreement contains provisions that reduce the standards to which our
general partner and directors would otherwise be held by Marshall Islands
law. For example, our partnership agreement:
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permits
our general partner to make a number of decisions in its individual
capacity, as opposed to in its capacity as our general partner. Where our
partnership agreement permits, our general partner may consider only the
interests and factors that it desires, and in such cases it has no duty or
obligation to give any consideration to any interest of, or factors
affecting us, our affiliates or our unitholders. Decisions made by our
general partner in its individual capacity will be made by its sole owner,
Capital Maritime. Specifically, pursuant to our partnership agreement, our
general partner will be considered to be acting in its individual capacity
if it exercises its call right, pre-emptive rights or registration rights,
consents or withholds consent to any merger or consolidation of the
partnership, appoints any directors or votes for the election of any
director, votes or refrains from voting on amendments to our partnership
agreement that require a vote of the outstanding units, voluntarily
withdraws from the partnership, transfers (to the extent permitted under
our partnership agreement) or refrains from transferring its units,
general partner interest or incentive distribution rights or votes upon
the dissolution of the partnership;
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provides
that our general partner and our directors are entitled to make other
decisions in “good faith” if they reasonably believe that the decision is
in our best interests;
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generally
provides that affiliated transactions and resolutions of conflicts of
interest not approved by the conflicts committee of our board of directors
and not involving a vote of unitholders must be on terms no less favorable
to us than those generally being provided to or available from unrelated
third parties or be “fair and reasonable” to us and that, in determining
whether a transaction or resolution is “fair and reasonable”, our board of
directors may consider the totality of the relationships between the
parties involved, including other transactions that may be particularly
advantageous or beneficial to us;
and
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provides
that neither our general partner and its officers nor our directors will
be liable for monetary damages to us, our limited partners or assignees
for any acts or omissions unless there has been a final and non-appealable
judgment entered by a court of competent jurisdiction determining that our
general partner or directors or its officers or directors or those other
persons engaged in actual fraud or willful
misconduct.
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In order to become a limited partner of
our partnership, a unitholder is required to agree to be bound by the provisions
in the partnership agreement, including the provisions discussed
above.
Fees
and cost reimbursements paid to Capital Ship Management for services provided to
us and certain of our subsidiaries are substantial, may fluctuate, and will
reduce our cash available for distribution to unitholders. Such fees and cost
reimbursements, the amount of which is determined by Capital Ship Management,
may increase as the vessel costs environment continues to increase or due to
other unforeseen events, and may change upon the expiration of the management
and administrative agreements currently in place.
We pay a
fixed daily fee for an initial term of approximately five years from the time we
take delivery of each vessel for services provided to us by Capital Ship
Management, and we reimburse Capital Ship Management for all expenses it incurs
on our behalf. The fixed daily fee to be paid to Capital Ship Management
includes all costs incurred in providing certain commercial and technical
management services to us, including vessel maintenance, crewing, purchasing and
insurance and also includes the expenses for each vessel’s next scheduled
special or intermediate survey, as applicable, and related
drydocking. In addition to the fixed daily fees payable under the
management agreement, Capital Ship Management is entitled to supplementary
remuneration for additional fees and costs of any direct and indirect
expenses it reasonably incurs in providing these services which may vary from
time to time, and which includes, amongst others, certain costs associated with
the vetting of our vessels, repairs related to unforeseen events and insurance
deductibles in accordance with the terms of the management agreement (the
“additional fees”). For the year ended December 31, 2009 such fees amounted to
approximately $3.0 million as compared to $1.0 million for the year ended
December 31, 2008. Such costs may increase further to reflect unforeseen events
and the continuing inflationary vessel costs environment. In addition, Capital
Ship Management provides us with administrative services, including audit,
legal, banking, investor relations, information technology and insurance
services, pursuant to an administrative services agreement with an initial term
of five years from the date of our initial public offering, and we reimburse
Capital Ship Management for all costs and expenses reasonably incurred by it in
connection with the provision of those services. Costs for these services are
not fixed and fluctuate depending on our requirements.
Going forward, when we acquire new
vessels or when the respective management agreements for our vessels expire, we
will have to enter into new agreements with Capital Ship Management or a third
party for the provision of the above services. It is possible that any such new
agreement may not be on the same or similar terms as our existing agreements,
and that the level of our operating costs may change following any such renewal.
Any increase in the costs and expenses associated with the provision of these
services by our manager in the future, such as the costs of crews for our time
chartered vessels and insurance, will lead to an increase in the fees we will
have to pay to Capital Ship Management under any new agreements we enter into.
The payment of fees to Capital Ship Management and reimbursement of expenses to
Capital Ship Management could adversely affect our ability to pay cash
distributions.
Our
partnership agreement contains provisions that may have the effect of
discouraging a person or group from attempting to remove our current management
or our general partner, and even if public unitholders are dissatisfied, they
will be unable to remove our general partner without Capital Maritime’s consent,
unless Capital Maritime’s ownership share in us is decreased, all of which could
diminish the trading price of our units.
Our
partnership agreement contains provisions that may have the effect of
discouraging a person or group from attempting to remove our current management
or our general partner:
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The
unitholders will be unable to remove our general partner without its
consent because our general partner and its affiliates own sufficient
units to be able to prevent its removal. The vote of the holders of at
least 66 2/3% of all outstanding units voting together as a single class
and a majority vote of our board of directors is required to remove the
general partner. As of December 31, 2009, Capital Maritime owned a 46.6%
interest in us, including 11,304,651common units and a 2% interest in us
through its ownership of our general
partner.
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Common
unitholders elect only four of the seven members of our board of
directors. Our general partner in its sole discretion has the right to
appoint the remaining three directors. Subordinated unitholders do not
elect any directors. We do not currently have any outstanding subordinated
units.
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Election
of the four directors elected by common unitholders is staggered, meaning
that the members of only one of three classes of our elected directors are
selected each year. In addition, the directors appointed by our general
partner will serve for terms determined by our general
partner.
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Our
partnership agreement contains provisions limiting the ability of
unitholders to call meetings of unitholders, to nominate directors and to
acquire information about our operations as well as other provisions
limiting the unitholders’ ability to influence the manner or direction of
management.
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Unitholders’
voting rights are further restricted by the partnership agreement
provision providing that if any person or group, other than our general
partner, its affiliates, their transferees, and persons who acquired such
units with the prior approval of our board of directors, owns beneficially
5% or more of any class of units then outstanding, any such units owned by
that person or group in excess of 4.9% may not be voted on any matter and
will not be considered to be outstanding when sending notices of a meeting
of unitholders, calculating required votes, except for purposes of
nominating a person for election to our board, determining the presence of
a quorum or for other similar purposes, unless required by law. The voting
rights of any such unitholders in excess of 4.9% will be redistributed pro
rata among the other common unitholders holding less than 4.9% of the
voting power of all classes of units entitled to
vote.
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We
have substantial latitude in issuing equity securities without unitholder
approval.
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The effect of these provisions may be
to diminish the price at which our units will trade.
The
control of our general partner may be transferred to a third party without
unitholder consent.
Our
general partner may transfer its general partner interest to a third party in a
merger or in a sale of all or substantially all of its assets without the
consent of the unitholders. In addition, our partnership agreement does not
restrict the ability of the members of our general partner from transferring
their respective membership interests in our general partner to a third party.
Any such change in control of our general partner may affect the way we and our
operations are managed which could have a material adverse effect on our
business, results of operations or financial condition and our ability to make
cash distributions.
Substantial
future sales of our units in the public market could cause the price of our
units to fall.
We have
granted registration rights to Capital Maritime and certain affiliates of
Capital Maritime. These unitholders have the right, subject to some conditions,
to require us to file registration statements covering any of our common,
subordinated or other equity securities owned by them at such time or to include
those securities in registration statements that we may file for ourselves or
other unitholders. There are currently no outstanding subordinated units. As of
December 31, 2009 Capital Maritime owned 11,304,651 common units registered
under our Registration Statement on Form F-3 dated August 29, 2008, as amended,
and certain incentive distribution rights. By exercising their registration
rights or selling a large number of units or other securities, as the case may
be, these unitholders could cause the price of our units to
decline.
We
may issue additional equity securities without unitholder approval, which
would dilute existing unitholders’ ownership
interests.
We may,
without the approval of our unitholders, issue an unlimited number of additional
units or other equity securities, including securities to Capital Maritime. In
particular, we have financed a portion of the purchase price of two
non-contracted vessels we acquired from Capital Maritime during 2008 through the
issuance of additional common units to Capital Maritime. The issuance by us of
additional units or other equity securities of equal or senior rank will have
the following effects:
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our
unitholders’ proportionate ownership interest in us will
decrease;
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the
amount of cash available for distribution on each unit may
decrease;
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the
relative voting strength of each previously outstanding unit may be
diminished; and
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the
market price of the units may
decline.
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In
establishing cash reserves, our board of directors may reduce the amount of cash
available for distribution to unitholders.
Our
partnership agreement requires our general partner to deduct from operating
surplus cash reserves that it determines are necessary to fund our future
operating expenditures. These reserves will also affect the amount of cash
available for distribution to our unitholders. See “—Risks Inherent in Our
Business—We must make substantial capital expenditures to maintain the operating
capacity of our fleet, which will reduce our cash available for distribution. In
addition, each quarter our board of directors is required to deduct estimated
maintenance and replacement capital expenditures from operating surplus, which
may result in less cash available to unitholders than if actual maintenance and
replacement capital expenditures were deducted”, our partnership agreement
requires our board of directors each quarter to deduct from operating surplus
estimated maintenance and replacement capital expenditures, as opposed to actual
expenditures, which could reduce the amount of available cash for distribution.
The amount of estimated maintenance and replacement capital expenditures
deducted from operating surplus is subject to review and change by our board of
directors at least once a year, provided that any change must be approved by the
conflicts committee of our board of directors.
Our
general partner has a limited call right that may require unitholders to
sell units at an undesirable time or price.
If at any
time our general partner and its affiliates own more than 80% of the common
units our general partner will have the right, which it may assign to any of its
affiliates or to us, but not the obligation, to acquire all, but not less than
all, of the common units or subordinated units held by unaffiliated persons at a
price not less than their then-current market price. As a result, unitholders
may be required to sell units at an undesirable time or price and may not
receive any return on their investment. Unitholders may also incur a tax
liability upon a sale of such units.
Unitholders
may not have limited liability if a court finds that unitholder action
constitutes control of our business.
As a
limited partner in a partnership organized under the laws of the Marshall
Islands, a unitholder could be held liable for our obligations to the
same extent as a general partner if it participates in the “control” of our
business. Our general partner generally has unlimited liability for the
obligations of the partnership, such as its debts and environmental liabilities,
except for those contractual obligations of the partnership that are expressly
made without recourse to our general partner. In addition, the limitations on
the liability of holders of limited partner interests for the obligations of a
limited partnership have not been clearly established in some jurisdictions in
which we do business.
We
can borrow money to pay distributions, which would reduce the amount of credit
available to operate our business.
Our
partnership agreement will allow us to make working capital borrowings to pay
distributions. Accordingly, we can make distributions on all our units even
though cash generated by our operations may not be sufficient to pay such
distributions. Any working capital borrowings by us to make distributions will
reduce the amount of working capital borrowings we can make for operating our
business. For more information, please read “Item 5B: Operating and Financial
Review and Prospects—Liquidity and Capital Resources—Borrowings”.
Increases
in interest rates may cause the market price of our units to
decline.
An
increase in interest rates may cause a corresponding decline in demand for
equity investments in general, and in particular for yield based equity
investments such as our units. Any such increase in interest rates or reduction
in demand for our units resulting from other relatively more attractive
investment opportunities may cause the trading price of our units to
decline.
Unitholders
may have liability to repay distributions.
Under
some circumstances, unitholders may have to repay amounts wrongfully returned or
distributed to them. Under the Marshall Islands Limited Partnership Act (the
“Marshall Islands Act”), we may not make a distribution to unitholders if
the distribution would cause our liabilities to exceed the fair value of our
assets. Marshall Islands law provides that for a period of three years from the
date of the impermissible distribution, limited partners who received the
distribution and who knew at the time of the distribution that it violated
Marshall Islands law will be liable to the limited partnership for the
distribution amount. Assignees who become substituted limited partners are
liable for the obligations of the assignor to make contributions to the
partnership that are known to the assignee at the time it became a limited
partner and for unknown obligations if the liabilities could be determined from
the partnership agreement. Liabilities to partners on account of their
partnership interest and liabilities that are non-recourse to the partnership
are not counted for purposes of determining whether a distribution is
permitted.
We
have a limited operating history, which makes it more difficult to accurately
forecast our future results and may make it difficult for investors to evaluate
our business and our future prospects, both of which will increase the risk of
your investment.
We were formed as an independent master
limited partnership on January 16, 2007. Only six of the vessels in our current
fleet had been delivered to the relevant vessel-owning subsidiaries as of
December 31, 2006, and only two were in operation for the full year then ended.
Moreover, as these vessels were operated as part of Capital Maritime’s fleet
during the reporting period, the vessels were operated in a different manner
than they are currently operated, and thus their historical results may not be
indicative of their future results. Because of our limited operating history, we
lack extended historical financial and operational data, making it more
difficult for an investor to evaluate our business, forecast our future revenues
and other operating results, and assess the merits and risks of an investment in
our common units. This lack of information will increase the risk of your
investment. Moreover, you should consider and evaluate our prospects in light of
the risks and uncertainties frequently encountered by companies with a limited
operating history. These risks and difficulties include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to older companies with longer
operating histories. Our failure to address these risks and difficulties
successfully could materially harm our business and operating
results.
We
will incur significant costs in complying with the requirements of the
Sarbanes-Oxley Act of 2002. If management is unable to continue to provide
reports as to the effectiveness of our internal control over financial reporting
or our independent registered public accounting firm is unable to continue to
provide us with unqualified attestation reports as to the effectiveness of our
internal control over financial reporting, investors could lose confidence in
the reliability of our financial statements, which could result in a decrease in
the value of our common units.
As a
publicly traded limited partnership, we are required to comply with the SEC’s
reporting requirements and with corporate governance and related requirements of
the U.S. Sarbanes-Oxley Act, the SEC and the Nasdaq Global Market, on which our
common units are listed. Section 404 of the Sarbanes−Oxley Act of 2002 (“SOX
404”) requires that we evaluate and determine the effectiveness of our internal
control over financial reporting on an annual basis and include in our reports
filed with the SEC our management’s assessment of the effectiveness of our
internal control over financial reporting and a related attestation of our
independent registered public accounting firm. As our manager, Capital Maritime
provides substantially all of our financial reporting, and we depend on the
procedures they have in place. If, in such future annual reports on Form 20-F,
our management cannot provide a report as to the effectiveness of our internal
control over financial reporting or our independent registered public accounting
firm is unable to provide us with an unqualified attestation report as to the
effectiveness of our internal control over financial reporting as required by
Section 404, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our common
units..
We have and expect we will continue to
have to dedicate a significant amount of time and resources to ensure compliance
with the regulatory requirements of SOX 404. We will continue to work with our
legal, accounting and financial advisors to identify any areas in which changes
should be made to our financial and management control systems to manage our
growth and our obligations as a public company. However, these and other
measures we may take may not be sufficient to allow us to satisfy our
obligations as a public company on a timely and reliable basis. If we have a
material weakness in our internal control over financial reporting, we may not
detect errors on a timely basis and our financial statements may be materially
misstated. We have incurred and will continue to incur legal, accounting and
other expenses in complying with these and other applicable regulations. We
anticipate that our incremental general and administrative expenses as a
publicly traded limited partnership taxed as a corporation for U.S. federal
income tax purposes will include costs associated with annual reports to
unitholders, tax returns, investor relations, registrar and transfer agent’s
fees, incremental director and officer liability insurance costs and director
compensation.
We
have been organized as a limited partnership under the laws of the Marshall
Islands, which does not have a well developed body of partnership
law.
Our
partnership affairs are governed by our partnership agreement and by the
Marshall Islands Act. The provisions of the Marshall Islands Act resemble
provisions of the limited partnership laws of a number of states in the United
States, most notably the State of Delaware. The Marshall Islands Act also
provides that it is to be applied and construed to make it uniform with the laws
of the State of Delaware Revised Uniform Partnership Act and, so long as it does
not conflict with the Marshall Islands Act or decisions of the Marshall Islands
courts, interpreted according to the non-statutory law (or case law) of the
State of Delaware. There have been, however, few, if any, court cases in the
Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware,
which has a fairly well-developed body of case law interpreting its limited
partnership statute. Accordingly, we cannot predict whether Marshall Islands
courts would reach the same conclusions as the courts in Delaware. For example,
the rights of our unitholders and the fiduciary responsibilities of our general
partner under Marshall Islands law are not as clearly established as under
judicial precedent in existence in Delaware. As a result, unitholders may have
more difficulty in protecting their interests in the face of actions by our
general partner and its officers and directors than would unitholders of a
limited partnership formed in the United States.
Because
we are organized under the laws of the Marshall Islands, it may be difficult to
serve us with legal process or enforce judgments against us, our directors or
our management.
We are organized under the laws of the
Marshall Islands as a limited partnership. Our general partner is
organized under the laws of the Marshall Islands as a limited liability company.
The Marshall Islands has a less developed body of securities laws as compared to
the United States and provides protections for investors to a significantly
lesser extent.
Most of
our directors and the directors and officers of our general partner and those of
our subsidiaries are residents of countries other than the United
States. Substantially all of our and our subsidiaries’ assets and a
substantial portion of the assets of our directors and the directors and
officers of our general partner are located outside the United States. Our
business is operated primarily from our office in Greece. As a result, it may be
difficult or impossible for unitholders or others to effect service of process
within the United States upon us, our directors, our general partner, our
subsidiaries or the directors and officers of our general partner or enforce
against us or them judgments obtained in United States courts if they believe
that their rights have been infringed under securities laws or otherwise,
including judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state of the United States. There is
also uncertainty as to whether the courts of the Marshall Islands and of other
jurisdictions would (1) recognize or enforce against us, our directors, our
general partner’s directors or officers judgments of courts of the United States
based on civil liability provisions of applicable U.S. federal and state
securities laws; or (2) impose liabilities against us, our directors, our
general partner or our general partner’s directors and officers in original
actions brought in the Marshall Islands, based on these laws.
Tax
Risks
In addition to the following risk
factors, you should read “Item 10E: Taxation” for a more complete discussion of
the expected material U.S. federal and non-U.S. income tax considerations
relating to us and the ownership and disposition of our units.
U.S.
tax authorities could treat us as a “passive foreign investment company”, which
could have adverse U.S. federal income tax consequences to U.S.
unitholders.
A foreign entity taxed as a corporation
for U.S. federal income tax purposes will be treated as a “passive foreign
investment company” (a “PFIC”), for U.S. federal income tax purposes, (x) if at
least 75.0% of its gross income for any taxable year consists of certain types
of “passive income”, or (y) at least 50.0% of the average value of the entity’s
assets produce or are held for the production of those types of “passive
income”. For purposes of these tests, “passive income” includes dividends,
interest, gains from the sale or exchange of investment property, and rents and
royalties other than rents and royalties that are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute “passive income”. U.S. unitholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect to the income
derived by the PFIC, the distributions they receive from the PFIC, and the gain,
if any, they derive from the sale or other disposition of their units in the
PFIC.
Based on our current and projected
method of operation, we believe that we are not currently PFIC nor do we expect
to become a PFIC. We intend to treat our income from time and spot chartering
activities as non-passive income, and the vessels engaged in those activities as
non-passive assets, for PFIC purposes. However, no assurance can be
given that the Internal Revenue Service (the “IRS”) will accept this position.
There are legal uncertainties involved in this determination, because there is
no direct legal authority under the PFIC rules addressing our current and
projected future operations. Moreover, a recent case by the U.S.
Court of Appeals for the Fifth Circuit held that, contrary to the position of
the IRS in that case, and for purposes of a different set of rules under the
Internal Revenue Code of 1986, as amended (the “Code”), income received under a
time charter of vessels should be treated as rental income rather than services
income. If the reasoning of this case were extended to the PFIC
context, the gross income we derive or are deemed to derive from our time and
spot chartering activities would be treated as rental income, and we would
probably be a PFIC. Accordingly, no assurance can be given that the
IRS or a United States court will accept the position that we are not a PFIC,
and there is a risk, particularly in light of the aforementioned case, that the
IRS or a United States court could determine that we are a
PFIC. Moreover, no assurance can be given that we would not
constitute a PFIC for any future taxable year if there were to be changes in our
assets, income or operations. See “Item 10E: Taxation—PFIC Status and
Significant Tax Consequences”.
The
preferential tax rates applicable to qualified dividend income are temporary,
and the enactment of previously proposed legislation could affect whether
dividends paid by us constitute qualified dividend income eligible for the
preferential rate.
Certain of our distributions may be
treated as qualified dividend income eligible for preferential rates of U.S.
federal income tax to U.S. individual unitholders (and certain other U.S.
unitholders). In the absence of legislation extending the term for these
preferential tax rates, all dividends received by such U.S. taxpayers in tax
years beginning on January 1, 2011 or later will be taxed at ordinary graduated
tax rates. Please read “Item 10E: Taxation—U.S. Federal Income Taxation of U.S.
Holders—Distributions”.
In addition, previously proposed
legislation would deny the preferential rate of U.S. federal income tax
currently imposed on qualified dividend income with respect to dividends
received from a non-U.S. corporation, unless the non-U.S. corporation either is
eligible for benefits of a comprehensive income tax treaty with the United
States or is created or organized under the laws of a foreign country that has a
comprehensive income tax system. Because the Marshall Islands has not entered
into a comprehensive income tax treaty with the United States and imposes only
limited taxes on entities organized under its laws, it is unlikely that we could
satisfy either of these requirements. Consequently, if this legislation were
enacted the preferential tax rates of federal income tax discussed under “Item
10E: Taxation—U.S. Federal Income Taxation of U.S. Holders—Distributions” herein
may no longer be applicable to distributions received from us. As of the date
hereof, it is not possible to predict with any certainty whether this previously
proposed legislation will be reintroduced and enacted.
We
may have to pay tax on United States source income, which would reduce our
earnings.
Under the Code, 50.0% of the gross
shipping income of a vessel-owning or chartering corporation that is
attributable to transportation that both begins or ends, but that does not begin
and end, in the U.S. is characterized as U.S. source shipping income and such
income generally is subject to a 4.0% U.S. federal income tax without allowance
for deduction, unless that corporation qualifies for exemption from tax under
Section 883 of the Code. We believe that we and each of our subsidiaries will
qualify for this statutory tax exemption, and we will take this position for
U.S. federal income tax return reporting purposes. However, there are factual
circumstances, including some that may be beyond our control, which could cause
us to lose the benefit of this tax exemption. In addition, our conclusion that
we currently qualify for this exemption is based upon legal authorities that do
not expressly contemplate an organization structure such as ours. Although we
have elected to be treated as a corporation for U.S. federal income tax
purposes, for corporate law purposes we are organized as a limited partnership
under Marshall Islands law. Moreover, our general partner will be responsible
for managing our business and affairs and has been granted certain veto rights
over decisions of our board of directors, which may negatively affect our
ability to qualify for an exemption from tax under Section 883 of the Code.
Therefore, we can give no assurances that the IRS will not take a different
position regarding our qualification, or the qualification of any of our
subsidiaries, for this tax exemption.
If we or our subsidiaries are not
entitled to this exemption under Section 883 for any taxable year, we or our
subsidiaries generally would be subject for those years to a 4.0% U.S. federal
gross income tax on our U.S. source shipping income. The imposition of this
taxation could have a negative effect on our business and would result in
decreased earnings available for distribution to our unitholders. See
“Item 10E:
Taxation The Section 883 Exemption”.
You
may be subject to income tax in one or more non-U.S. countries, including
Greece, as a result of owning our units if, under the laws of any such country,
we are considered to be carrying on business there. Such laws may require you to
file a tax return with and pay taxes to those countries.
We intend that our affairs and the
business of each of our subsidiaries will be conducted and operated in a
manner that minimizes income taxes imposed upon us and these subsidiaries
or that may be imposed upon you as a result of owning our units. However,
because we are organized as a partnership, there is a risk in some jurisdictions
that our activities and the activities of our subsidiaries may be attributed to
our unitholders for tax purposes and, thus, that you will be subject to tax in
one or more non-U.S. countries, including Greece, as a result of owning our
units if, under the laws of any such country, we are considered to be carrying
on business there. If you are subject to tax in any such country, you may be
required to file a tax return with and to pay tax in that country based on your
allocable share of our income. We may be required to reduce distributions to you
on account of any withholding obligations imposed upon us by that country in
respect of such allocation to you. The United States may not allow a tax credit
for any foreign income taxes that you directly or indirectly incur.
We believe we can conduct our
activities in a manner so that our unitholders should not be considered to be
carrying on business in Greece solely as a consequence of the acquisition,
holding, disposition or redemption of our units. However, the question of
whether either we or any of our subsidiaries will be treated as carrying on
business in any country, including Greece, will largely be a question of fact
determined through an analysis of contractual arrangements, including the
management agreement and the administrative services agreement we will enter
into with Capital Ship Management, and the way we conduct business or
operations, all of which may change over time. The laws of Greece or any other
foreign country may also change, which could cause the country’s taxing
authorities to determine that we are carrying on business in such country and
are subject to its taxation laws. Any foreign taxes imposed on us or any
subsidiaries will reduce our cash available for distribution.
A.
History and Development of the Partnership
We are a master limited partnership
formed as Capital Product Partners L.P. under the laws of the Marshall Islands
on January 16, 2007. We maintain our principal executive headquarters at 3
Iassonos Street, Piraeus, 18537 Greece and our telephone number is +30 210 4584
950.
In March 2007 we entered into a 10-year
revolving credit facility of up to $370.0 million with HSH Nordbank AG
which is non-amortizing until June 2012 and can be used for acquisitions and for
general partnership purposes. To date, we have used $366.5 million of this
facility.
On April 3, 2007, we completed our IPO
of 13,512,500 common units at a price of $21.50 per unit. We did not receive any
proceeds from the sale of our common units. Capital Maritime used part of the
proceeds from our IPO to repay the debt on the eight vessels that made up our
fleet at the time of the IPO and concurrently transferred its interest in the
vessel-owning companies of these eight newly built, double hull medium range
(“MR”) product tanker under medium or long-term time or bareboat charter vessels
to us. Capital Maritime also paid the offering expenses, underwriting discounts,
selling commissions and brokerage fees incurred in connection with the IPO. At
the time of the IPO Capital Maritime also granted us a right of first offer
under an omnibus agreement for any MR tankers in its fleet under charter for two
or more years, giving us the opportunity to purchase additional vessels in the
future and we also entered into agreements with Capital Ship Management, a
subsidiary of Capital Maritime, to provide management and technical services in
connection with these and future vessels.
At the time of the IPO we also entered
into an agreement to acquire seven newbuildings from Capital Maritime at the
time of their delivery to Capital Maritime, for a total purchase price of $368.0
million, at the time of their delivery to Capital Maritime. We took delivery of
the first four vessels between May and September 2007 with the remaining three
vessels delivered between January and August 2008. All seven of these vessels
were under medium to long term charters with BP Shipping Limited, Morgan Stanley
Capital Group Inc. and subsidiaries of Overseas Shipholding Group Inc.
at the time of their delivery.
Between September 2007 and April 2008
we also acquired three additional, non-contracted, vessels from Capital
Maritime. In September 2007 we acquired the M/T Attikos, a 12,000 dwt, 2005
built double-hull product tanker chartered to Trafigura Beheer B.V. at the time,
at a purchase price of $23.0 million. In March and April 2008 we purchased
the M/T Amore Mio II, a 160,000 dwt, 2001 built tanker chartered to
BP Shipping Limited, and the M/T Aristofanis, 12,000 dwt, 2005 built product
tanker sister vessel to the M/T Attikos chartered to Shell International Trading
& Shipping Company Ltd, from Capital Maritime. The aggregate purchase price
for the M/T Amore Mio II was $95.0 million and for the M/T Aristofanis $23.0
million under the terms of the relevant share purchase agreement with Capital
Maritime. We funded a portion of the purchase price of the vessels through the issuance of 2,048,823 and 501,308 common units to Capital Maritime,
respectively, at a price of $18.42 and $20.08, respectively, per unit,
which was the price per unit as quoted on the Nasdaq Stock Exchange on the day
prior to the respective acquisition, and the
remainder through the incurrence of $57.5 million of debt under our new credit
facility and $2.0 million in cash. In conjunction with the equity issued
to Capital Maritime, Capital Maritime, made capital contributions to our general
partner, Capital GP L.L.C., of 40,976 and 10,026 common units, respectively, in
order for it to maintain its 2% general partner interest in us.
In March 2008, we entered into an
additional 10-year revolving credit facility of up to $350.0 million with HSH
Nordbank AG which is non-amortizing until March 2013 and can be used to finance
a portion of the purchase price of future acquisitions. To date, we have used
$107.5 million of
this facility, leaving capacity of $242.5 million.
On August 29, 2008, we filed a
registration statement on Form F-3 with the SEC using a “shelf” registration
process. Under this shelf registration process, we may sell, in one
or more offerings, up to $300.0 million in total aggregate offering price of the
common units, and Capital Maritime may sell up to 11,304,651 common units
(including the 8,805,522 common units issued upon conversion of the subordinated
units into common units on a one for one basis on February 14, 2009). To date,
no securities have been offered under the shelf registration
process.
On January 30, 2009, we announced the
payment of an exceptional non-recurring distribution of $1.05 per unit for the
fourth quarter of 2008, bringing annual distributions to unitholders to $2.27
per unit for the year ended December 31, 2008, a level which under the terms of
our partnership agreement resulted in the early termination of the subordination
period and the automatic conversion of the subordinated units into common units.
Our board of directors unanimously determined that taking into account the
totality of relationships between the parties involved, the payment of this
exceptional distribution was in our best interests taking into consideration the
general economic conditions, our business requirements, risks relating to our
business as well as alternative uses available for our cash. This exceptional
distribution was funded from operating surplus and through a decrease in
existing reserves. Payment of the exceptional distribution was made on February
13, 2009 to unitholders of record on February 10, 2009. Following such automatic
conversion, Capital Maritime owns a 46.6% interest in us, including 11,304,651
common units and a 2% interest through its ownership of our general partner
Capital GP L.L.C., and may significantly impact any vote under the terms of the
partnership agreement. The common units owned
by Capital Maritime have the same rights as our other outstanding common
units.
In April 2009, we extended our charter
coverage and renewed our fleet when we acquired all of Capital Maritime’s
interest in its wholly owned subsidiaries that own the M/T Ayrton II and the M/T
Agamemnon II, two of the vessels identified under the omnibus agreement, in
exchange for all of our interest in our wholly owned subsidiaries that own the
M/T Atrotos and the M/T Assos. Both acquired vessels were under time charters to
BP expiring in 2011 at the time of their delivery. As part of the transaction,
we paid an additional consideration of $4.0 million per vessel to Capital
Maritime and remained responsible for any costs associated with the delivery of
the vessels to Capital Maritime. Morgan Stanley Capital Group Inc., the
charterer of the M/T Assos and the M/T Atrotos, compensated us for the early
termination of the charters of these two vessels which were scheduled to expire
in October 2009 and April 2010, respectively.
In June 2009, we reached agreement with
HSH Nordbank AG, whereby we amended the terms of both our credit facilities
effective for a three year period from the end of June 2009 to the end of June
2012. Under the terms of the amendments the fleet loan-to-value covenant was
increased to 80% from 72.5%. It was also agreed to amend the manner in which
market valuations of vessels are conducted. The interest margin was also
increased to 1.35%-1.45% over LIBOR subject to the level of the asset
covenants. All other terms in our credit facilities remained
unchanged.
In January 2010, we rechartered two
tanker vessels, the M/T Axios and the M/T Agisilaos, with subsidiaries of
Capital Maritime. Each charter shall commence directly upon the vessel’s
redelivery from its current charter with BP Shipping Limited and is for a 12
month period (+/- 30 days). The performance of each charter is guaranteed by
Capital Maritime.
As of December 31, 2009, our fleet
consisted of 18 double-hull, high specification tankers including one of the
largest Ice Class 1A MR product tanker fleets in the world based on number of
vessels and carrying capacity. We currently have no capital commitments to
purchase or build additional vessels. We intend to continue to evaluate
potential acquisitions and to take advantage of our relationship with Capital
Maritime in a prudent manner that is accretive to our unitholders and to
long-term distribution growth.
On
January 29, 2010, we provided guidance for expected distributions to our
unitholders in 2010, announcing a target annual distribution level of $0.90 per
unit paid equally over four quarters. Please see “—Business Overview—Recent
Developments” below for more information.
Please see “—Our Fleet” below for more
information regarding our vessels, their charters, acquisition dates and prices
and other information, “Item 5B: Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Net Cash Used in Investing Activities
and Note 1 (Basis of Presentation and General Information) to our Financial
Statements included herein for more information regarding any acquisitions,
including a detailed explanation of how they were accounted for
and “Item 7B: Related-Party Transactions” for a description of the
terms of certain transactions.
B.
Business Overview
We are an international tanker company
and our 18 vessels trade on a worldwide basis and are capable of carrying crude
oil, refined oil products, such as gasoline, diesel, fuel oil and jet fuel, as
well as edible oils and certain chemicals such as ethanol. Our vessels comply
not only with the strict regulatory standards that are currently in place but
also with the stricter regulatory standards that are currently expected to be
implemented. We currently charter 17 of our 18 vessels under medium to long-term
time and bareboat charters (two to 10 years, with an average remaining term of
approximately 3.7 years as of December 31, 2009) to large charterers such as BP
Shipping Limited, Morgan Stanley Capital Group Inc., Shell International
Trading & Shipping Company Ltd. and subsidiaries of Overseas Shipholding
Group Inc. All our time and bareboat charters provide for the receipt of a
fixed base rate for the life of the charter, and in the case of 10 of our 11
time charters, also provide for profit sharing arrangements in excess of the
base rate. Please see “Profit Sharing Arrangements” below for a detailed
description of how profit sharing is calculated.
Business
Strategies
Our
primary business objective is to pay a sustainable quarterly distribution per
unit and to increase our distributions over time by executing the following
business strategies (please see “—Recent Developments” below for our current
guidance on target distributions for 2010):
|
|
●
|
Maintain
medium to long-term fixed charters. We believe that the
medium to long-term, fixed-rate nature of our charters, our profit sharing
arrangements, and our agreement with Capital Ship Management for the
commercial and technical management of our vessels provide a stable base
of revenue and predictable expenses that will result in stable cash flows
in the medium to long-term. As our vessels come up for rechartering we
will seek to redeploy them under contracts that reflect our expectations
of the market conditions prevailing at the time. We believe that
the age of our fleet, which is one of the youngest in the industry,
the high specifications of our vessels and our manager’s ability to meet
the rigorous vetting requirements of some of the world’s most selective
major international oil companies position us well to recharter our
vessels.
|
|
|
●
|
Expand our
fleet through accretive acquisitions. We intend to
continue to evaluate potential acquisitions of additional vessels and to
take advantage of our unique relationship with Capital Maritime to make
strategic acquisitions in the medium to long term in a prudent manner that
is accretive to our unitholders and to long-term distribution
growth. We will continue to evaluate opportunities to acquire both
newbuildings and second-hand vessels, if and when they are chartered for
more than two years, from Capital Maritime and from third parties as we
seek to grow our fleet in a way which is accretive to our distributions.
In addition, we believe our access to the credit and capital markets and
our financial flexibility enhance our ability to realize new vessel
acquisitions from Capital Maritime or third parties that are accretive to
our unitholders.
|
|
|
●
|
Capitalize
on our relationship with Capital Maritime and expand our charters with
recognized charterers. We believe that we can leverage
our relationship with Capital Maritime and its ability to meet the
rigorous vetting processes of leading oil companies in order to attract
new customers. We also plan to increase the number of vessels we charter
to our existing charterers as well as enter into charter agreements with
new customers in order to maintain a portfolio of charters that is diverse
from a customer, geography and maturity
perspective.
|
|
|
●
|
Maintain
and build on our ability to meet rigorous industry and regulatory safety
standards. Capital Ship Management, an affiliate of our general
partner that manages our vessels, has an excellent vessel safety record,
is capable of fully complying with rigorous health, safety and
environmental protection standards, and is committed to providing our
customers with a high level of customer service and support. We believe
that in order for us to be successful in growing our business in the
future, we will need to maintain our excellent vessel safety record and
maintain and build on our high level of customer service and
support.
|
Competitive
Strengths
We believe that we are well-positioned
to execute our business strategies and our future prospects for success are
enhanced because of the following competitive strengths:
|
|
●
|
Strong
relationship with Capital Maritime. We believe our
relationship with Capital Maritime and its affiliates provides numerous
benefits that are key to our long-term growth and success, including
Capital Maritime’s reputation within the shipping industry and its network
of strong relationships with many of the world’s leading oil companies,
commodity traders and shipping companies. We also benefit from Capital
Maritime’s expertise in technical fleet management and its ability to meet
the rigorous vetting requirements of some of the world’s most selective
major international oil companies, including BP p.l.c., Chevron
Corporation, Conoco-Phillips Inc., ExxonMobil Corporation, Royal Dutch
Shell plc, StatoilHydro ASA, and Total
S.A.
|
|
|
●
|
Leading
position in the product tanker market, with a modern, capable fleet, built
to high specifications. Our fleet of 18 tankers
includes one of the largest Ice Class 1A MR fleets in the world based
on number of vessels and carrying capacity. The IMO II/III and Ice Class
1A classification notations of most of our vessels provide a high degree
of flexibility as to what cargoes our charterers can choose to trade as
they employ our fleet. We also believe that the range in size and the
geographic flexibility of our fleet are attractive to our charterers,
allowing them to consider a variety of trade routes and cargoes. With an
average age of approximately 3.5 years as of December 31, 2009, our fleet
is one of the youngest fleets of its size in the
world. Finally, we believe our vessels’ compliance with
existing and expected regulatory standards, the high technical
specifications of our vessels and our fleet’s flexibility to transport a
wide variety of refined products and crude oil across a wide range of
trade routes is attractive to our existing and potential
charterers.
|
|
|
●
|
Financial
strength and flexibility. Subject to compliance
with the relevant covenants we currently have $246.0 million in undrawn
amounts available under our 10-year non-amortizing credit facilities
entered into at the time of our IPO and in March 2008. We may use these
amounts to finance up to 50% of the purchase price of any potential future
purchases of modern tanker vessels from Capital Maritime or any third
parties. We believe
that the terms of our amended credit facilities enhance our
financial flexibility to realize new vessel acquisitions from Capital
Maritime and third parties.
|
|
|
Recent
Developments
|
On
January 29, 2010, we announced that based on the challenging economic
environment and specifically the much lower charter rates in the market, we
believe we should reduce our targeted future annual distribution level to below
our previous distributions. In particular, our management noted the direct
impact that the low charter rate environment will have on the partnership as
eight of our vessels are coming off charter in 2010 and an additional three
vessels in 2011. As a result, the board of directors agreed with management’s
guidance that a target annual distribution level of $0.90 per unit paid equally
over four quarters is more prudent for the partnership under current conditions.
We believe that this distribution is sustainable over the medium to longer term
even if the charter rate environment remains at its current depressed levels.
The new annual distribution level will provide us with a number of advantages,
in particular provide us with greater financial flexibility and liquidity,
assist us in pursuing our long-term business strategy of accretive acquisitions
and increase our ability to take advantage of growth opportunities. The tanker
shipping market is cyclical and we would be looking at factors, such as improved
oil product demand, the expected implementation of the single-hull tanker phase
out, the availability of shipping finance and further delays and cancellations
that are likely to reduce the number of new tanker vessel deliveries, in order
to assess a potential market recovery in 2010/2011. We will monitor these
factors closely and if they improve we will consider revisiting our distribution
guidance.
Our
Customers
We provide marine transportation
services under medium-to long-term time charters or bareboat charters with
counterparties that we believe are creditworthy. Currently, our customers
include:
|
|
●
|
BP Shipping
Limited, the shipping affiliate of BP p.l.c., one of the world’s
largest producers of crude oil and natural gas. BP p.l.c. has exploration
and production interests in over 20 countries. BP Shipping provides all
logistics for the marketing of BP’s oil and gas
cargoes.
|
|
|
●
|
Morgan
Stanley Capital Group Inc., the commodities division of Morgan
Stanley, the international investment bank, is a leading commodities
trading firm in the energy and metals markets, encompassing both physical
and derivative capabilities.
|
|
|
●
|
Overseas
Shipholding Group Inc., one of the largest independent
shipping companies in the world operating crude and product tankers. As of
October 31, 2009 Overseas
Shipholding Group Inc.’s operating fleet consisted of 129 vessels, 26
of which were under construction, aggregating 13.1 million
dwt.
|
|
|
●
|
Shell
International Trading & Shipping Company Ltd., a subsidiary of Royal Dutch Shell
plc., is the
principal trading and shipping business of the Royal Dutch/Shell Group.
It trades millions
of barrels crude oil and oil products and moves cargoes on
some 100 deep-sea tankers and gas
carriers around the world on a daily
basis.
|
|
|
●
|
Capital
Maritime & Trading Corp., an established shipping company
with activities in the sea transportation of wet (crude oil,
oil products, chemicals) and dry cargos worldwide with a long
history of operating and investing in the shipping
markets.
|
For the
year ended December 31, 2009, BP Shipping Limited, Morgan Stanley Capital Group
Inc. and subsidiaries of Overseas Shipholding Group Inc accounted for 59%,
22% and 12% of our revenues, respectively. For the year ended December 31, 2008
BP Shipping Limited and Morgan Stanley Capital Group Inc., accounted for 54% and
33% of our revenues, respectively, and for the year ended December 31, 2007 they
accounted for 58% and 24% of our revenues, respectively. The loss of
any significant customer or a substantial decline in the amount of services
requested by a significant customer could harm our business, financial condition
and results of operations.
Our
Fleet
At the time of our IPO on April 3,
2007, our fleet consisted of eight vessels. Since that date, the size of our
fleet has increased in terms of both number of vessels and carrying capacity and
currently consists of 18 vessels of various sizes with an average age of
approximately 3.5 years and average remaining term under our charters of
approximately 3.7 years (as of December 31, 2009).
The following table summarizes certain
key information with respect to the vessels we have purchased from Capital
Maritime since our IPO:
|
Name of Vessel
|
Contracted Purchase at IPO
|
Acquisition/Delivery Date
|
Purchase Price
|
|||||
|
Atrotos
|
Yes
|
May
2007
|
$ | 56,000,000 | ||||
|
Akeraios
|
Yes
|
July
2007
|
$ | 56,000,000 | ||||
|
Anemos
I
|
Yes
|
September
2007
|
$ | 56,000,000 | ||||
|
Apostolos
|
Yes
|
September
2007
|
$ | 56,000,000 | ||||
|
Attikos
|
No
|
September
2007
|
$ | 23,000,000 | ||||
|
Alexandros
II
|
Yes
|
January
2008
|
$ | 48,000,000 | ||||
|
Amore
Mio II (1)
|
No
|
March
2008
|
$ | 85,739,320 | ||||
|
Aristofanis
(1)
|
No
|
April2008
|
$ | 21,566,265 | ||||
|
Aristotelis
II
|
Yes
|
June
2008
|
$ | 48,000,000 | ||||
|
Aris
II
|
Yes
|
August
2008
|
$ | 48,000,000 | ||||
|
Agamemnon
II (2)
|
No
|
April
2009
|
$ | 39,774,578 | ||||
|
Ayrton
II (2)
|
No
|
April
2009
|
$ | 38,721,322 | ||||
___________
(1) The M/T
Amore Mio II was acquired on March 27, 2008 and the M/T Aristofanis was acquired
on April 30, 2008. Please see “Item 4: A. History and Development of the
Partnership” above and Note 1 (Basis of Presentation and General Information) to
our Financial Statements included herein for more information regarding these
acquisitions, including details of the funding of such
acquisitions
(2) The
M/T Agamemnon II and the M/T Ayrton II, two of the six vessels that Capital
Maritime had granted us an offer to purchase under the terms of the omnibus
agreement, were acquired in exchange for the M/T Assos (which was part of our
fleet at the time of the IPO) and the M/T Atrotos (which was acquired from
Capital Maritime in May 2007) on April 7 and April 13, 2009, respectively.
Please see Note 1 (Basis of Presentation and General Information) to our
Financial Statements included herein for more information regarding these
acquisitions.
We intend to continue to take advantage
of our unique relationship with Capital Maritime and, subject to prevailing
shipping, charter and financial market conditions and the approval of our board
of directors, make strategic acquisitions in the medium to long term in a
prudent manner that is accretive to our unitholders and to long-term
distribution growth. Pursuant to the omnibus agreement we entered into with
Capital Maritime at the time of our IPO, Capital Maritime has granted us a right
of first offer for any MR tankers in its fleet under charter for two or more
years. Two of the vessels identified under the omnibus agreement were acquired
by us in April 2009. Capital Maritime is, however, under no obligation to fix
any of these vessels under charters of two or more years. Please read “Item 7B:
Related-Party Transactions” for a detailed description of our omnibus agreement
with Capital Maritime.
The table below provides summary
information as of December 31, 2009 about the vessels in our fleet and the
vessels we have acquired or may have the opportunity to acquire from Capital
Maritime, as well as their delivery date or expected delivery date to us and
their employment,
including earliest possible redelivery dates of the vessels and the relevant
charter rates. The table also includes the daily management fee and approximate
expected termination date of the management agreement with Capital Ship
Management with respect to each vessel. Sister vessels, which are vessels of
similar specifications and size typically built at the same shipyard, are
denoted by the same letter in the table. We believe that sister vessels provide
a number of efficiency advantages in the management of our fleet.
All of
the vessels in our fleet are or were designed, constructed, inspected and tested
in accordance with the rules and regulations of Det Norske Veritas (“DNV”),
Lloyd’s Register of Shipping (“Lloyd’s”) or the American Bureau of
Shipping (“ABS”) and were under time or bareboat charters from the time of
their delivery.
OUR
FLEET
|
Vessel Name
|
Sister
Vessels (1)
|
Year Built
|
DWT
|
OPEX
(per day)
|
Management
Agreement Expiration
|
Duration/
Charter
Type (2)
|
Expiry
of
Charter (3)
|
Daily
Charter
Rate (Net) (4)
|
Profit
Share
|
Charterer
(5)
|
Description
|
||||||||||||||||||||||
|
VESSELS CURRENTLY IN OUR
FLEET
|
|||||||||||||||||||||||||||||||||
|
Atlantas
(6)
|
A | 2006 | 36,760 | $ | 250 |
Jan-Apr
2011
|
8-year
BC
|
Mar-2014
|
$ | 15,000 | (7) |
BP
|
Ice
Class 1A IMO II/III Chemical/ Product
|
||||||||||||||||||||
|
Aktoras
(6)
|
A | 2006 | 36,759 | $ | 250 |
Apr-Jul
2011
|
8-year
BC
|
Jun-2014
|
$ | 15,000 | (7) |
BP
|
|||||||||||||||||||||
|
Aiolos
(6)
|
A | 2007 | 36,725 | $ | 250 |
Nov
‘11-Feb ‘12
|
8-year
BC
|
Feb-2015
|
$ | 15,000 | (7) |
BP
|
|||||||||||||||||||||
|
Agisilaos
|
A | 2006 | 36,760 | $ | 5,500 |
May-Aug
2011
|
3.6-year
TC
|
Mar-2010
|
$ | 19,750 | (8)(9) |
ü
|
BP
|
||||||||||||||||||||
|
Arionas
|
A | 2006 | 36,725 | $ | 5,500 |
Aug-Nov
2011
|
3.6-year
TC
|
Jun-2010
|
$ | 19,750 | (8) |
ü
|
BP
|
||||||||||||||||||||
|
Axios
|
B | 2007 | 47,872 | $ | 5,500 |
Dec
11-Mar 12
|
3-year
TC
|
Jan-2010
|
$ | 20,500 | (8)(10) |
ü
|
BP
|
||||||||||||||||||||
|
Avax
|
B | 2007 | 47,834 | $ | 5,500 |
Dec
11-Mar 12
|
3-year
TC
|
May-2010
|
$ | 20,500 |
ü
|
BP
|
|||||||||||||||||||||
|
Akeraios
|
B | 2007 | 47,781 | $ | 5,500 |
May-Aug
2012
|
3-year
TC
|
Jun-2010
|
$ | 20,000 |
ü
|
MS
|
|||||||||||||||||||||
|
Anemos
I
|
B | 2007 | 47,782 | $ | 5,500 |
Jul-Oct
2012
|
3-year
TC
|
Aug-2010
|
$ | 20,000 |
ü
|
MS
|
|||||||||||||||||||||
|
Apostolos
|
B | 2007 | 47,782 | $ | 5,500 |
Jul-Oct
2012
|
3-year
TC
|
Aug-2010
|
$ | 20,000 |
ü
|
MS
|
|||||||||||||||||||||
|
Attikos
(11)
|
C | 2005 | 12,000 | $ | 5,500 |
Sept-Nov
2012
|
Spot
|
Spot
|
- | - |
Chem./Prod.
|
||||||||||||||||||||||
|
Alexandros
II (12)(13)
|
D | 2008 | 51,258 | $ | 250 |
Dec
12-Mar 13
|
10-year
BC
|
Dec-2017
|
$ | 13,000 |
OSG
|
IMO
II/III Chem./Prod.
|
|||||||||||||||||||||
|
Amore
Mio II
|
E | 2001 | 159,982 | $ | 8,500 |
Mar-Apr
2013
|
3-year
TC
|
Jan-2011
|
$ | 36,000 | (8) |
ü
|
BP
|
Crude
Oil
|
|||||||||||||||||||
|
Aristofanis
|
C | 2005 | 12,000 | $ | 5,500 |
Mar-Apr
2013
|
2-year
TC
|
Mar-2010
|
$ | 12,952 |
Shell
|
Product
|
|||||||||||||||||||||
|
Aristotelis
II (12)(13)
|
D | 2008 | 51,226 | $ | 250 |
Mar-Jun
2013
|
10-year
BC
|
May-2018
|
$ | 13,000 |
OSG
|
IMO
II/III
Chem./Prod.
|
|||||||||||||||||||||
|
Aris
II (12)(13)
|
D | 2008 | 51,218 | $ | 250 |
May-Aug
2013
|
10-year
BC
|
Jul-2018
|
$ | 13,000 |
OSG
|
||||||||||||||||||||||
|
Agamemnon
II (14)
|
D | 2008 | 51,238 | $ | 6,500 |
Oct
2013
|
3-year
TC
|
Dec-2011
|
$ | 22,000 |
ü(15)
|
BP
|
|||||||||||||||||||||
|
Ayrton
II (14)
|
D | 2009 | 51,260 | $ | 6,500 |
Mar
2014
|
2-year
TC
|
Mar-2011
|
$ | 22,000 |
ü(15)
|
BP
|
|||||||||||||||||||||
|
Total
Fleet DWT:
|
862,962 | ||||||||||||||||||||||||||||||||
|
VESSELS WE MAY PURCHASE FROM CAPITAL MARITIME IF
UNDER LONG TERM CHARTER (16)
|
|||||||||||||||||||||||||||||||||
|
Aristidis
|
A | 2006 | 36,680 |
Ice
Class 1A IMO II/III Chemical/ Product
|
|||||||||||||||||||||||||||||
|
Alkiviadis
|
A | 2006 | 36,721 | ||||||||||||||||||||||||||||||
|
Assos
|
B | 2006 | 47,872 | ||||||||||||||||||||||||||||||
|
Atrotos
|
B | 2007 | 47,786 | ||||||||||||||||||||||||||||||
|
Total
DWT:
|
169,059 | ||||||||||||||||||||||||||||||||
__________
|
(1)
|
Sister
vessels are denoted in the tables by the same letter as follows: (A)
and (B): these vessels were built by Hyundai MIPO Dockyard Co., Ltd.,
South Korea, (C): these vessels were built by Baima Shipyard, China, (D):
these vessels were built by STX Shipbuilding Co., Ltd., South Korea, (E):
this vessel was built by Daewoo Shipbuilding and Marine Engineering
Co., Ltd., South Korea.
|
|
(2)
|
TC:
Time Charter, BC: Bareboat Charter.
|
|
(3)
|
Earliest
possible redelivery date. The redelivery date for the M/T Aristofanis is
the date of expiration. The redelivery period for the M/T Agisilaos is
between March 1 and March 29, 2010 and for the M/T Arionas it is between
June 3 and June 30, 2010. For all other charters, the redelivery date is
+/–30 days at the charterer’s
option.
|
|
(4)
|
All
rates quoted above are the net rates after we or our charterers have paid
any relevant commissions on the base rate. The BP time and bareboat
charters are subject to 1.25% commissions. The Shell time charter is
subject to 2.25% commissions. We do not pay any commissions in connection
with the MS time charters.
|
|
(5)
|
BP:
BP Shipping Limited. MS: Morgan Stanley Capital Group Inc. OSG:
certain subsidiaries of Overseas Shipholding Group Inc. Shell: Shell
International Trading & Shipping Company
Ltd.
|
|
(6)
|
For
the duration of the BC these vessels have been renamed British Ensign,
British Envoy and British Emissary,
respectively.
|
|
(7)
|
The
last three years of the BC will be at a daily charter rate of $13,433
(net).
|
|
(8)
|
In
addition to a commission on the gross charter rate, the ship broker is
entitled to an additional 1.25% commission on the profit
share.
|
|
(9)
|
Agreement
reached for the vessel to be rechartered with a subsidiary of Capital
Maritime at a net daily charter rate of $11,850 ($12,000 gross) and
includes 50/50 profit share for voyages outside the Institute Warranty
Limits (IWL). The charter commences directly upon the vessel’s redelivery
from its current charter, expected in March 2010 and is for a period of 12
months (+/- 30 days). The performance of the charter is guaranteed by
Capital Maritime.
|
|
(10)
|
Agreement
reached for the vessel to be rechartered with a subsidiary of Capital
Maritime at a net daily charter rate of $12, 591 ($12,750 gross) and
includes 50/50 profit share for voyages outside the IWL. The charter
commences directly upon the vessel’s redelivery from its current charter,
expected in February 2010, for a period of 12 months (+/- 30 days). The
performance of the charter is guaranteed by Capital
Maritime.
|
|
(11)
|
The
M/T Attikos concluded its 2.3 year time charter with Trafigura Beheer B.V.
in October 2009. The vessel is currently trading on the spot
market.
|
|
(12)
|
For
the duration of the BC these vessels have been renamed: Overseas Serifos,
Overseas Sifnos and Overseas
Kimolos.
|
|
(13)
|
OSG
has an option to purchase each vessel at the end of the eighth, ninth or
tenth year of its charter for $38.0 million, $35.5 million and
$33.0 million, respectively, which option is exercisable six months
before the date of completion of the relevant year of the charter. The
expiration date above may therefore change depending on whether the
charterer exercises its purchase
option.
|
|
(14)
|
The
M/T Agamemnon II and the M/T Ayrton II, two of the six vessels for which
Capital Maritime had granted us an offer to purchase under the terms of
the omnibus agreement, were acquired in exchange for the M/T Assos (which
was part of our fleet at the time of the IPO) and the M/T Atrotos (which
was acquired from Capital Maritime in May 2007) on April 7 and April 13,
2009, respectively.
|
|
(15)
|
Profit
share element for these vessels applies only to voyages outside the
IWL.
|
|
(16)
|
Pursuant
to our omnibus agreement with Capital Maritime, Capital Maritime has
granted us a right of first offer for any MR tankers in its fleet under
charter for two or more years. We are under no obligation to exercise such
right.
|
Our
Charters
Seventeen of the 18 vessels in our
fleet are under medium to long-term time or bareboat charters with an average
remaining term under our charters of approximately 3.7 years as of December 31,
2009. One of our vessels currently trades on the spot market and, under certain
circumstances, we may operate additional vessels in the spot market until they
have been fixed under appropriate medium to long-term charters. As our vessels
come up for rechartering we will seek to redeploy them under contracts that
reflect our expectations of the market conditions prevailing at the time. Please
see “—Our Fleet” above, including the chart and accompanying notes, for more
information on our time and bareboat charters, including counterparties,
expected expiration dates of the charters and daily charter rates.
Time
Charters
A time charter is a contract for the
use of a vessel for a fixed period of time at a specified daily rate. Under a
time charter, the vessel’s owner provides crewing and other services related to
the vessel’s operation, the cost of which is included in the daily rate and the
charterer is responsible for substantially all vessel voyage costs except for
commissions which are assumed by the owner. In the case of the vessels under
time charter to Morgan Stanley Capital Group Inc., the charterer is also
responsible for the payment of all commissions. The basic hire rate payable
under the charters is a previously agreed daily rate, as specified in the
charter, payable at the beginning of the month in U.S. Dollars. We currently
have 11 vessels under time charter agreements of which 10 contain profit-sharing
provisions that allow us to realize at a pre-determined percentage additional
revenues when spot rates are higher than the base rates incorporated in our
charters or, in some instances, through greater utilization of our vessels by
our charterers.
Profit Sharing
Arrangements
Morgan Stanley Profit
Sharing. Pursuant to an agreement reached with Morgan Stanley
Capital Group Inc. on July 28, 2008, which took effect
retroactively as of June 1, 2008, the profit sharing arrangements for each
vessel time chartered with Morgan Stanley Capital Group Inc. are calculated
according to the two-step process set out below. Initially, a weighted average
of two indices published daily by the Baltic Exchange based on specific routes
and cargo sizes representative of the vessel’s trading is calculated and settled
quarterly. Specifically, the calculation is based on the performance of the
transatlantic route (TC2) and the Caribbean-US route (TC3) at certain
predetermined weights. If the weighted average time charter equivalent (“TCE”)
is less than or equal to the basic hire rate, then we receive the basic hire
rate only. If the weighted average TCE exceeds the basic hire rate, then we
receive the basic hire rate plus 50% of the excess. In addition, we have the
right to access the charterer’s annual results of operations for each vessel,
and, if these show that the vessel has earned more than the calculation above,
we receive 50% of the vessel’s actual profits less any amounts already received
pursuant to the calculation above. If the annual results of
operations for each vessel do not exceed the estimated profit calculation based
on the two routes then no additional payments are made. No commissions are
payable on revenues derived from our profit shares. Annual results of operations
from the charterer are to be presented by December 31 of each year for the
period commencing December 1 of the previous year to November 30 of the year in
question, with the exception of the fiscal year from December 1, 2007 to
November 30, 2008 for which results of operations were settled semi-annually, in
May and November 2008.
BP Profit Sharing. The profit
sharing arrangements for four of the seven vessels time chartered with BP
Shipping Limited are based on the calculation of the TCE according to the “last
to next” principle. This means that actual voyage revenues earned and received,
actual expenses incurred and actual time taken to perform the voyage are used
for the purpose of the calculation. The charterer is obliged to provide us with
a copy of each fixture note and all reasonable documentation with respect to
items of cost and earnings referring to each voyage within every calculation
period, as well as with a statement listing actual voyage results for voyages
completed and estimated results for any voyage not completed at the time of
settlement. When actual revenue and/or expenses have not been settled,
BP Shipping Limited’s estimates apply but remain subject to adjustment upon
closing of actual accounts. If the average daily TCE is less than or equal to
the basic gross hire rate, then we receive the basic net hire rate only. If the
average daily TCE exceeds the basic gross hire rate, then we receive the basic
net hire rate plus 50% of the excess over the gross hire rate. The profit share
with BP Shipping Limited is calculated and settled quarterly.
In the case of the M/T Amore Mio II,
the profit share is calculated and settled monthly and is based on the weighted
monthly average of two indices published daily by the Baltic Exchange based on
specific routes and cargo sizes representative of the vessel’s
trading.
In the case of the M/T Agamemnon II and
the M/T Ayrton II, profit share is calculated and settled following the
completion of each voyage according to the “last to next” principle and is only
applicable to voyages during which Institute Warranty Limits have been breached.
In such event, we receive the basic net hire rate plus 50% of the excess over
the gross hire rate.
In addition to the 1.25% commission we
pay on the gross charter rate for each vessel, the relevant ship broker is also
entitled to an additional 1.25% commission on the amount of profit share
received from the M/T Agisilaos, the M/T Arionas, the M/T Axios and the M/T
Amore Mio II.
TCE rate is a shipping industry
performance measure used primarily to compare daily earnings generated by
vessels on time charters with daily earnings generated by vessels on voyage
charters, because charter hire rates for vessels on voyage charters are
generally not expressed in per day amounts while charter hire rates for vessels
on time charters generally are expressed in such amounts. TCE is expressed as
per ship per day rate and is calculated as voyage and time charter revenues less
voyage expenses during a period divided by the number of operating days during
the period, which is consistent with industry standards.
Bareboat
Charters
A bareboat charter is a contract
pursuant to which the vessel owner provides the vessel to the customer for a
fixed period of time at a specified daily rate, and the customer provides for
all of the vessel’s expenses (including any commissions) and generally assumes
all risk of operation. In the case of the vessels under bareboat charter to BP
Shipping Limited, we are responsible for the payment of any commissions. The
customer undertakes to maintain the vessel in a good state of repair and
efficient operating condition and drydock the vessel during this period at its
cost and as per the classification society requirements. The basic rate hire is
payable to us monthly in advance in U.S. Dollars. We currently have six vessels
under bareboat charter, three with BP Shipping Limited and three with
subsidiaries of Overseas Shipholding Group Inc. The charters entered into with
subsidiaries of Overseas Shipholding Group Inc. are fully and
unconditionally guaranteed by Overseas Shipholding Group Inc. and include
options for the charterer to purchase each vessel for $38.0 million,
$35.5 million or $33.0 million at the end of the eighth, ninth or
tenth year of the charter, respectively. In each case, the option to purchase
the vessel must be exercised six months prior to the end of the charter
year.
Spot
Charters
A spot charter generally refers to a
voyage charter or a trip charteror a short term time charter. We currently have
one vessel trading in the spot market.
Voyage
/ Trip Charter
A voyage charter involves the carriage
of a specific amount and type of cargo on a load port-to-discharge port basis,
subject to various cargo handling terms. Under a typical voyage charter, the
shipowner is paid on the basis of moving cargo from a loading port to a
discharge port. In voyage charters the shipowner generally is responsible for
paying both vessel operating costs and voyage expenses, and the charterer
generally is responsible for any delay at the loading or discharging ports.
Under a typical trip charter or short term time charter, the shipowner is paid
on the basis of moving cargo from a loading port to a discharge port at a set
daily rate. The charterer is responsible for paying for bunkers and other voyage
expenses, while the shipowner is responsible for paying vessel operating
expenses.
Seasonality
Our vessels operate under medium to
long-term charters and are not generally subject to the effect of seasonable
variations in demand.
Management
of Ship Operations, Administration and Safety
Capital Maritime, through its
subsidiary Capital Ship Management, provides expertise in various functions
critical to our operations. This enables a safe, efficient and cost-effective
operation and, pursuant to a management agreement and an administrative services
agreement we have entered into with Capital Ship Management, grants
us access to human resources, financial and other administrative
services, including bookkeeping, audit and accounting services, administrative
and clerical services, banking and financial services, client, investor
relations, information technology and technical management services, including
commercial management of the vessels, vessel maintenance and crewing (not
required for vessels subject to bareboat charters), purchasing, insurance and
shipyard supervision.
Under our time charter arrangements,
Capital Ship Management, our manager, is generally responsible for commercial,
technical, health and safety and other management services related to the
vessels’ operation, and the charterer is responsible for port expenses, canal
dues and bunkers and, in the case of the Morgan Stanley Capital Group Inc.
time charters, for commissions. Pursuant to our management agreement,
we pay a fixed daily fee per vessel for our time chartered vessels, for an
initial term of approximately five years from when we take delivery of each
vessel which covers vessel operating expenses, which include crewing, repairs
and maintenance, insurance and the expenses of the next scheduled special or
intermediate survey for each vessel, as applicable, and related drydocking.
Please see the table in “—Our Fleet” above for a list of the daily fee payable
and approximate expected termination dates of the management agreement with
Capital Ship Management with respect to each vessel currently in our fleet.
Capital Ship Management is directly responsible for providing all of these items
and services. Capital Ship Management is also entitled to supplementary
remuneration for additional fees and costs (as defined in our management
agreement) of any direct and indirect expenses it reasonably incurs in providing
these services which may vary from time to time, and which includes, amongst
others, certain costs associated with the vetting of our vessels, repairs
related to unforeseen extraordinary events and insurance deductibles. For the
year ended December 31, 2009, such additional fees amounted to approximately
$3.0 million, compared to $1.0 million for the year ended December 31, 2008.
Such costs may further increase to reflect unforeseen events and the continuing
inflationary vessel costs environment. The sole expense we incur in connection
with our vessels under bareboat charter is a daily fee of $250 per bareboat
chartered vessel payable to Capital Ship Management, mainly to cover compliance
costs. Capital Ship Management may provide these services to us directly or it
may subcontract for certain of these services with other entities, including
other Capital Maritime subsidiaries. Going forward, when we acquire new vessels
or when the respective management agreements for our vessels expire, we will
have to enter into new agreements which may provide for different fees or
include different terms. For more information on the management agreement and
administrative services agreements we have entered into with Capital Ship
Management please read “Item 7B: Related-Party Transactions—Management
Agreement” and “—Administrative Services Agreement.”
Capital Ship Management operates under
a safety management system in compliance with the IMO’s ISM code and certified
by the American Bureau of Shipping. Capital Ship Management’s management systems
also comply with the quality assurance standard ISO 9001, the environmental
management standard ISO 14001 and the Occupational Health & Safety
Management System (“OHSAS”) 18001, all of which are certified by Lloyd’s
Register of Shipping. Capital Ship Management recently implemented an
“Integrated Management System Certification” approved by the Lloyd’s Register
Group and also adopted “Business Continuity Management” principles in
cooperation with Lloyd’s Register Group. Two of the vessels managed by Capital
Ship Management Corp. topped BP’s ranking of top performing vessels in its time
chartered fleet of over 100 vessels for 2008. Capital Ship Management was also
selected as “Tanker Company of the Year 2009” at the annual Lloyd’s List Greek
Shipping Awards which took place in December 2009.
As a result, our vessels’ operations
are conducted in a manner intended to protect the safety and health of Capital
Ship Management’s employees, as applicable, the general public and the
environment. Capital Ship Management’s technical management team actively
manages the risks inherent in our business and is committed to eliminating
incidents that threaten safety, such as groundings, fires, collisions and
petroleum spills, as well as reducing emissions and waste
generation.
Major
Oil Company Vetting Process
Shipping in general, and crude oil,
refined product and chemical tankers, in particular, have been, and will remain,
heavily regulated. Many international and national rules, regulations and other
requirements – whether imposed by the classification societies, international
statutes (IMO, SOLAS (defined below), MARPOL, etc.), national and local
administrations or industry – must be complied with in order to enable a
shipping company to operate and a vessel to trade.
Traditionally there have been
relatively few large companies in the oil trading business and the industry
is continuously consolidating. The so called “oil majors companies”, such as BP
p.l.c., Chevron Corporation, Conoco-Phillips Inc., ExxonMobil Corporation, Royal
Dutch Shell plc, StatoilHydro ASA, and Total S.A., together with a few smaller
companies, represent a significant percentage of the production, trading and,
especially, shipping logistics (terminals) of crude and refined products
world-wide. Concerns for the environment, health and safety have led the oil
majors to develop and implement a strict due diligence process when selecting
their commercial partners. This vetting process has evolved into a sophisticated
and comprehensive risk assessment of both the vessel operator and the
vessel.
While a plethora of parameters are
considered and evaluated prior to a commercial decision, the oil majors, through
their association, the Oil Companies International Marine Forum (“OCIMF”), have
developed and are implementing two basic tools: (i) a Ship Inspection Report
Programme (“SIRE”) and (ii) the Tanker Management & Self Assessment (“TMSA”)
Program. The former is a physical ship inspection based upon a thorough Vessel
Inspection Questionnaire (“VIQ”), and performed by accredited OCIMF inspectors,
resulting in a report being logged on SIRE, while the latter is a recent
addition to the risk assessment tools used by the oil majors.
Based upon commercial needs, there are
three levels of risk assessment used by the oil majors: (i) terminal use, which
will clear a vessel to call at one of the oil major’s terminals; (ii) voyage
charter, which will clear the vessel for a single voyage; and (iii) term
charter, which will clear the vessel for use for an extended period of time. The
depth, complexity and difficulty of each of these levels of assessment vary.
While for the terminal use and voyage charter relationships a ship inspection
and the operator’s TMSA will be sufficient for the assessment to be undertaken,
a term charter relationship also requires a thorough office assessment. In
addition to the commercial interest on the part of the oil major, an excellent
safety and environmental protection record is necessary to ensure an office
assessment is undertaken.
We believe Capital Maritime and Capital
Ship Management are among a small number of ship management companies to have
undergone and successfully completed audits by six major international oil
companies in the last few years (i.e., BP p.l.c., Chevron Corporation,
ExxonMobil Corporation Royal Dutch Shell plc, StatoilHydro ASA, and Total
S.A.).
Crewing
and Staff
Capital Ship Management, an affiliate
of Capital Maritime, through a subsidiary in Romania and crewing agents in
Romania, Russia and the Philippines recruits senior officers for our
vessels. Capital Ship Management also maintains a presence in the Philippines
and Russia and has entered into an agreement for the training of officers under
ice conditions at a specialized training center in St. Petersburg. Capital
Maritime’s vessels are currently manned primarily by Romanian, Russian and
Filipino crew members. Having employed these crew configurations for Capital
Maritime for a number of years, Capital Ship Management has considerable
experience in operating vessels in this configuration and has a pool of
certified and experienced crew members which we can access to recruit crew
members for our vessels.
Classification,
Inspection and Maintenance
Every oceangoing vessel must be
“classed” and certified by a classification society. The classification society
is responsible for verifying that the vessel has been built and maintained in
accordance with the rules and regulations of the classification society and
ship’s country of registry as well as the international conventions of which
that country has accepted and signed. In addition, where surveys are required by
international conventions and corresponding laws and ordinances of a flag state,
the classification society will undertake them on application or by official
order, acting on behalf of the authorities concerned.
The classification society also
undertakes on request other surveys and checks that are required by regulations
and requirements of the flag state or port authority. These surveys are subject
to agreements made in each individual case and/or to the regulations of the
country concerned.
For the maintenance of the class
certificate, regular and extraordinary surveys of hull and machinery, including
the electrical plant, and any special equipment classed are required to be
performed as follows:
Annual Surveys, which are
conducted for the hull and the machinery at intervals of 12 months from the date
of commencement of the class period indicated on the certificate.
Intermediate Surveys, which
are extended annual surveys and are typically conducted two and one-half years
after commissioning and after each class renewal survey. In the case of
newbuildings, the requirements of the intermediate survey can be met through an
underwater inspection in lieu of drydocking the vessel. Intermediate surveys may
be carried out on the occasion of the second or third annual
survey.
Class Renewal Surveys (also
known as special
surveys), which are carried out at the intervals indicated by the
classification for the hull (usually at five year intervals). During the special
survey, the vessel is thoroughly examined, including Non-Destructive Inspections
(“NDIs”) to determine the thickness of the steel structures. Should the
thickness be found to be less than class requirements, the classification
society will order steel renewals. The classification society may grant a
one-year grace period for completion of the special survey. Substantial amounts
of funds may have to be spent for steel renewals to pass a special survey if the
vessel experiences excessive wear and tear. In lieu of the special survey every
five years, depending on whether a grace period is granted, a ship-owner or
manager has the option of arranging with the classification society for the
vessel’s hull or machinery to be on a continuous survey cycle, in which every
part of the vessel would be surveyed within a five-year cycle. At an owner’s
application, the surveys required for class renewal may be split according to an
agreed schedule to extend over the entire period of class. This process is
referred to as ESP (Enhanced Survey Program) and CSM (Continuous Machinery
Survey).
Occasional Surveys which are
carried out as a result of unexpected events, e.g. an accident or other
circumstances requiring unscheduled attendance by the classification society for
re-confirming that the vessel maintains its class, following such an unexpected
event.
All areas subject to survey, as defined
by the classification society, are required to be surveyed at least once per
class period, unless shorter intervals between surveys are prescribed elsewhere.
The period between two subsequent surveys of each area must not exceed five
years.
Most vessels are also dry-docked every
30 to 36 months for inspection of the underwater parts and for repairs related
to inspections. If any defects are found, the classification surveyor will issue
a ‘‘recommendation’’ which must be rectified by the ship-owner within prescribed
time limits. Most insurance underwriters make it a condition for insurance
coverage that a vessel be certified as “in class” by a classification society
which is a member of the International Association of Classification Societies.
All of our vessels are certified as being “in class” by ABS, Lloyd’s, DNV and,
in the case of the M/T Aristofanis, China Classification Society. All
new and secondhand vessels that we may purchase must be certified prior to their
delivery under our standard agreements. If any vessel we contract to purchase is
not certified as “in class” on the date of closing, we will have no obligation
to take delivery of such vessel.
Risk
Management and Insurance
The operation of any ocean-going vessel
carries an inherent risk of catastrophic marine disasters, death or personal
injury and property losses caused by adverse weather conditions, mechanical
failures, human error, war, terrorism, piracy and other circumstances or events.
The occurrence of any of these events may result in loss of revenues or
increased costs or, in the case of marine disasters, catastrophic liabilities.
Although we believe our current insurance program is comprehensive, we cannot
insure against all risks, and we cannot be certain that all covered risks are
adequately insured against or that we will be able to achieve or maintain
similar levels of coverage throughout a vessel’s useful life. Furthermore, there
can be no guarantee that any specific claim will be paid by the insurer or that
it will always be possible to obtain insurance coverage at reasonable rates.
More stringent environmental regulations at times in the past have resulted in
increased costs for, and may result in the lack of availability of, insurance
against the risks of environmental damage or pollution. Moreover, under the
terms of our bareboat charters, the charterer provides for the insurance of the
vessel, and as a result, these vessels may not be adequately insured and/or in
some cases may be self-insured. Any uninsured or under-insured loss has the
potential to harm our business and financial condition or could materially
impair or end our ability to trade or operate.
We currently carry the traditional
range of main and liability insurance coverage for each of our vessels to
protect against most of the accident-related risks involved in the conduct of
our business. Specifically we carry:
|
|
●
|
Hull and machinery
insurance covers loss of or damage to a vessel due to marine perils
such as collisions, grounding and weather and the coverage is usually to
an agreed “insured value” which, as a matter of policy, is never less than
the particular vessel’s fair market value. Cover is subject to policy
deductibles which are always subject to
change.
|
|
|
●
|
Increased value insurance
augments hull and machinery insurance cover by providing a low-cost
means of increasing the insured value of the vessels in the event of a
total loss casualty.
|
|
|
●
|
Protection and indemnity
insurance is the principal coverage for third party liabilities and
indemnifies against such liabilities incurred while operating vessels,
including injury to the crew, third parties, cargo or third party property
loss (including oil pollution) for which the shipowner is responsible. We
carry the current maximum available amount of coverage for oil pollution
risks, $1.0 billion per vessel per
incident.
|
|
|
●
|
War Risks insurance
covers such items as piracy and
terrorism.
|
|
|
●
|
Freight, Demurrage &
Defense cover is a form of legal costs insurance which responds as
appropriate to the costs of prosecuting or defending commercial (usually
uninsured operating) claims.
|
Not all risks are insured and not all
risks are insurable. The principal insurable risks which nevertheless remain
uninsured across the fleet are “loss of hire” and “strikes.” We do not insure
these risks because the related costs of such insurance are regarded as
disproportionate to the benefit.
The following table sets forth certain
information regarding our insurance coverage as of December 31,
2009.
|
Type
|
Aggregate Sum Insured For All Vessels in our
Existing Fleet*
|
|
|
Hull
and Machinery
|
$819.24
million (increased value insurance (including excess liabilities) provides
additional coverage).
|
|
|
Increased
Value (including Excess Liabilities)
|
Up
to $335.6 million additional coverage in total.
|
|
|
Protection
and Indemnity (P&I)
|
Pollution
liability claims: limited to $1.0 billion per vessel per
incident.
|
|
|
War
Risk
|
$1.2
billion
|
|
|
*Certain
of our bareboat charterers are responsible for the insurance on the
vessels. The values attributed to those vessels are in line with the
values agreed in the relevant charters as augmented by separate
insurances.
|
||
The
International Product Tanker Industry
The international seaborne
transportation industry represents the most cost effective method of
transporting large volumes of crude oil and refined petroleum products. The
seaborne movement of refined petroleum products between regions addresses demand
and supply imbalances for such products caused by the lack of resources or
refining capacity in consuming countries. Global demand for the shipping of
refined products and crude oil has grown historically at a faster rate than the
demand for the refined products and the crude oil themselves. However, in 2008
and 2009, oil demand has contracted sharply as a result of the global economic
slowdown. The demand for product and crude oil tankers is cyclical and a
function of several factors, including the general strength of the economy,
location of oil production and the distance from refineries as well as refining
and consumption and world oil demand and supply. As a consequence of the
deterioration in the global oil products demand, the demand for product tankers
has deteriorated from the second quarter of 2009 onwards.
According
to a report issued on January 15, 2010 by the International Energy Agency (the
“IEA”), global oil product demand for 2009 was approximately 84.9
mb/d compared to 86.2 mbd during 2008. The IEA also projects 2010 oil
demand to grow by 1.7% to 86.3 mb/d. Growth is expected to be driven by non-OECD
countries, most notably Asia. Due to increasing environmental restrictions on
the building of refineries in the countries that belong to the Organization for
Economic Co-operation and Development (the “OECD”), additional refineries are
expected to continue to be built at locations far from such points of
consumption, resulting in refined product tankers being required to travel
longer distances on each voyage. The refining industry may respond to the
economic downturn and demand weakness, by reducing refinery operating rates and
by reducing or canceling plans for certain investment expansion plans,
including additional refining capacity. The worldwide financial and economic
downturn may continue to adversely affect demand for tankers, due to the
expected contraction in crude oil and oil product demand.
Competition
We operate in a highly fragmented,
highly diversified global market with many charterers, owners and operators of
vessels.
Competition for charters can be intense
and the ability to obtain favorable charters depends, in addition to price, on a
variety of other factors, including the location, size, age, condition and
acceptability of the vessel and its operator to the charterer and is frequently
tied to having an available vessel which has met the strict operational and
financial standards established by the oil major companies to pre-qualify or vet
tanker operators prior to entering into charters with them. Although we believe
that at the present time no single company has a dominant position in the
markets in which we compete, that could change and we may face substantial
competition for medium to long-term charters from a number of experienced
companies who may have greater resources or experience than we do when we try to
recharter our vessels, especially as a large number of our vessels will come off
charter during 2010. However, Capital Maritime is among a small number of ship
management companies that has undergone and successfully completed audits by six
major international oil companies in the last few years, including audits with
BP p.l.c., Chevron Corporation, ExxonMobil Corporation, Royal Dutch Shell plc,
StatoilHydro ASA, and Total S.A. We believe our ability
to comply with the rigorous standards of major oil companies, relative to less
qualified or experienced operators, allows us to effectively compete for new
charters.
Regulation
General
Our operations and our status as an
operator and manager of ships are significantly regulated by international
conventions, Class requirements, U.S. federal, state and local and foreign
health, safety and environmental protection laws and regulations, including OPA
90, the Comprehensive Environmental Response, Compensation, and Liability Act
(“CERCLA”), the U.S. Port and Tanker Safety Act, the Act to Prevent Pollution
from Ships, the U.S. Clean Air Act (“Clean Air Act”), as well as regulations
adopted by the IMO and the European Union, various volatile organic compound air
emission requirements, IMO/U.S. Coast Guard pollution regulations and various
Safety of Life at Sea (“SOLAS”) amendments, as well as other regulations
described below. In addition, various jurisdictions either have or are
considering regulating the management of ballast water to prevent the
introduction of non-indigenous species considered to be invasive. Compliance
with these laws, regulations and other requirements could entail additional
expense, including vessel modifications and implementation of certain operating
procedures.
We are also required by various other
governmental and quasi-governmental agencies to obtain permits, licenses and
certificates for our vessels, depending upon such factors as the country of
registry, the commodity transported, the waters in which the vessel operates,
the nationality of the vessel’s crew, the age and size of the vessel and our
status as owner or charterer. Failure to maintain necessary permits, licenses or
certificates could require us to incur substantial costs or temporarily suspend
operations of one or more of our vessels.
We believe that the heightened
environmental and quality concerns of insurance underwriters, regulators and
charterers will in the future impose greater inspection and safety requirements
on all vessels in the shipping industry. In addition to inspections by us, our
vessels are subject to both scheduled and unscheduled inspections by a variety
of governmental and private entities, each of which may have unique
requirements. These entities include the local port authorities (such as U.S.
Coast Guard, harbor master or equivalent), classification societies, flag state
administration P&I Clubs, charterers, and particularly terminal operators
and major oil companies which conduct frequent vessel inspections.
Our vessels operate in full compliance
with applicable environmental laws and regulations. However, because such laws
and regulations frequently change and may impose increasingly strict
requirements, we cannot predict the ultimate cost of complying with these and
any future requirements or the impact of these and any future requirements on
the resale value or useful lives of our vessels.
United
States Requirements
The United States regulates the tanker
industry with an extensive regulatory and liability regime for environmental
protection and the cleanup of oil spills, primarily through OPA 90 and
CERCLA.
OPA 90 affects all vessel owners and
operators shipping oil or petroleum products to, from, or within U.S. waters.
The law phases out the use of tankers having single-hulls and can effectively
impose unlimited liability on vessel owners and operators in the event of an oil
spill. Under OPA 90, vessel owners, operators and bareboat charterers are
liable, without regard to fault, for all containment and clean-up costs and
other damages, including natural resource damages and economic loss without
physical damage to property, arising from oil spills and pollution from their
vessels. Effective July 31, 2009, the U.S. Coast Guard adopted interim
regulations that adjusted the limits of OPA liability for double-hull vessels to
the greater of $2,000 per gross ton or $17,088,000 million per tanker that
is over 3,000 gross tons (subject to possible adjustment for inflation), unless
the incident was caused by gross negligence, willful misconduct, or a violation
of certain regulations, in which case liability was unlimited. In addition, OPA
90 does not preempt state law and permits individual states to impose their own
liability regimes with regard to oil pollution incidents occurring within their
boundaries. Coastal states have enacted pollution prevention, liability and
response laws, many providing for unlimited liability. CERCLA, which applies to
the discharge of hazardous substances (other than oil) whether on land or at
sea, contains a similar liability regime and provides for cleanup, removal and
natural resource damages. Liability under CERCLA is limited to the greater of
$300 per gross ton or $0.5 million, unless the incident is caused by gross
negligence, willful misconduct, or a violation of certain regulations, in which
case liability is unlimited.
The financial responsibility
regulations for tankers issued under OPA 90 also require owners and operators of
vessels entering U.S. waters to obtain, and maintain with the U.S. Coast Guard,
Certificates of Financial Responsibility, or COFRs, in the amount sufficient to
meet the maximum aggregate liability under OPA 90 and CERCLA. All of our vessels
that need COFRs have them.
We insure each of our tankers with
pollution liability insurance in the maximum commercially available amount of
$1.0 billion per incident. A catastrophic spill could exceed the insurance
coverage available, in which event there could be a material adverse effect on
our business. OPA 90 requires that tankers over 5,000 gross ton calling at U.S.
ports have double hulls if contracted after June 30, 1990 or delivered
after January 1, 1994. Furthermore, OPA 90 calls for the phase-out of all
single hull tankers by the year 2015 according to a schedule that is based on
the size and age of the vessel, unless the tankers are retrofitted with
double-hulls. All of the vessels in our fleet have double hulls.
We believe that we are in compliance
with OPA 90, CERCLA and all applicable state regulations in U.S. ports where our
vessels call.
OPA 90
also amended the Clean Water Act to require owners and operators of vessels to
adopt contingency plans for reporting and responding to oil spill scenarios up
to a “worst case” scenario and to identify and ensure, through contracts or
other approved means, the availability of necessary private response resources
to respond to a “worst case discharge.” In addition, periodic training programs
and drills for shore and response personnel and for vessels and their crews are
required. Our vessel response plans have been approved by the U.S. Coast Guard.
The Clean Water Act prohibits the discharge of oil or hazardous substances in
U.S. navigable waters and imposes strict liability in the form of penalties for
unauthorized discharges. The Clean Water Act also imposes substantial liability
for the costs of removal, remediation and damages and complements the remedies
available under the more recent OPA 90 and CERCLA, discussed herein. The U.S.
Environmental Protection Agency (the “EPA”) regulates the discharge into U.S.
waters of ballast water and other substances incidental to the normal operation
of vessels. Under the EPA, commercial vessels greater than 79 feet in
length are required to obtain coverage under the Vessel General Permit, or VGP,
by submitting a Notice of Intent. The VGP incorporates current U.S. Coast Guard
requirements for ballast water management as well as supplemental ballast water
requirements and includes technology-based and water-quality based limits for
other discharges, such as deck runoff, bilge water and gray
water. Administrative provisions, such as monitoring, recordkeeping
and reporting requirements, are also included. We have submitted NOIs for our
vessels operating in U.S. waters and will likely incur costs to meet the
requirements of the VGP. Several environmental groups and industry associations
have filed challenges, which are pending in U.S. federal courts, to EPA’s
issuance of the VGP. In addition, various states, such as Michigan and
California, have also enacted, or proposed, legislation restricting ballast
water discharges and the introduction of non-indigenous species considered to be
invasive. These and any similar restrictions enacted in the future could include
ballast water treatment obligations that could increase the cost of operating in
the United States. For example, this could require the installation of equipment
on our vessels to treat ballast water before it is discharged or the
implementation of other port facility disposal arrangements or procedures at
potentially substantial cost and/or otherwise restrict our vessels from entering
certain U.S. waters.
The Clean Air Act (or CAA) requires the
EPA to promulgate standards applicable to emissions of volatile organic
compounds and other air contaminants. The Clean Air Act also requires states to
draft State Implementation Plans (“SIPs”) designed to attain national
health-based air quality standards in primarily major metropolitan and/or
industrial areas. Several SIPs regulate emissions resulting from vessel loading
and unloading operations by requiring the installation of vapor control
equipment. Individual states, including California, have also attempted to
regulate vessel emissions within state waters. California also has adopted fuel
content regulations that will apply to all vessels sailing within 24 miles of
the California coastline and whose itineraries call for them to enter any
California ports, terminal facilities, or internal or estuarine waters. In
addition, on March 27, 2009, the United States requested for the IMO to
designate the area extending 200 miles from the territorial sea baseline
adjacent to the Atlantic/Gulf and Pacific coasts and the eight main Hawaiian
Islands as Emission Control Areas under recent amendments to the Annex VI of
MARPOL (discussed below). If the Emission Control Areas is approved or other new
or more stringent requirements relating to emissions from marine diesel engines
or port operations by vessels are adopted by EPA or the states where we operate,
compliance with these regulations could entail significant capital expenditures
or otherwise increase the costs of our operations.
International
Requirements
The IMO has also
negotiated international conventions that impose liability for oil pollution in
international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention
for the Prevention of Pollution from Ships to address air pollution from ships.
Annex VI, which became effective in May 2005, sets limits on sulphur oxide
and nitrogen oxide emissions from ship exhausts and prohibits deliberate
emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI
also includes a global cap on the sulphur content of fuel oil and allows for
special areas to be established with more stringent controls on sulphur
emissions. At its 58th
session in October 2008, the MEPC voted unanimously to adopt amendments to Annex
VI to the MARPOL, regarding particulate matter, nitrogen oxide and sulfur oxide
emissions. The revised Annex VI reduces air pollution from vessels by, among
other things (i) implementing a progressive reduction of sulfur oxide emissions
from ships, with the global sulfur cap reduced initially to 3.50% (from the
current cap of 4.50%), effective from January 1, 2012, then progressively to
0.50%, effective from January 1, 2020, subject to a feasibility review to be
completed no later than 2018; and (ii) establishing new tiers of stringent
nitrogen oxide emissions standards for new marine engines, depending on their
date of installation. More stringent emission standards could apply in coastal
areas designated as Emission Control Areas. These amendments to Annex VI are
expected to enter into force on July 1, 2010, which is six months after the
deemed acceptance date of January 1, 2010. Once these amendments become
effective, we may incur costs to comply with these revised standards. A failure to comply with
Annex VI requirements could result in a vessel not being able to operate. The
European Union also has established limitations on the sulfur content of marine
fuels.
All of our vessels are subject to Annex
VI regulations. We believe that our existing vessels meet relevant Annex VI
requirements and that our undelivered product tankers will be fitted with these
emission control systems prior to their delivery.
The ISM Code, promulgated by the IMO,
also requires the party with operational control of a vessel to develop an
extensive safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and describing
procedures for responding to emergencies. The ISM Code requires that vessel
operators obtain a safety management certificate for each vessel they operate.
No vessel can obtain a certificate unless its manager has been awarded a
document of compliance, issued by each flag state, under the ISM Code. All of
our ocean going vessels are ISM certified.
Noncompliance with the ISM Code and
other IMO regulations may subject the shipowner or bareboat charterer to
increased liability, may lead to decreases in available insurance coverage for
affected vessels and may result in the denial of access to, or detention in,
some ports. For example, the U.S. Coast Guard and EU authorities have indicated
that vessels not in compliance with the ISM Code will be prohibited from trading
in U.S. and EU ports.
Many countries have ratified and follow
the liability plan adopted by the IMO and set out in the International
Convention on Civil Liability for Oil Pollution Damage of 1969 (the “CLC”) (the
United States, with its separate OPA 90 regime, is not a party to the CLC).
Under this convention and depending on whether the country in which the damage
results is a party to the 1992 Protocol to the International Convention on Civil
Liability for Oil Pollution Damage, a vessel’s registered owner is strictly
liable for pollution damage caused in the territorial waters of a contracting
state by discharge of persistent oil, subject to certain defenses. Under an
amendment to the Protocol that became effective on November 1, 2003, for
vessels of 5,000 to 140,000 gross tons, liability will be limited to
approximately $7.1 million plus $989.2 for each additional gross ton over
5,000. For vessels of over 140,000 gross tons, liability will be limited to
approximately $140.7 million. As the convention calculates liability in
terms of a basket of currencies, these figures are based on currency exchange
rates on December 31, 2009. The right to limit liability is forfeited under the
International Convention on Civil Liability for Oil Pollution Damage where the
spill is caused by the owner’s actual fault and under the 1992 Protocol where
the spill is caused by the owner’s intentional or reckless conduct. Vessels
trading to states that are parties to these conventions must provide evidence of
insurance covering the liability of the owner. In jurisdictions where the
International Convention on Civil Liability for Oil Pollution Damage has not
been adopted, various legislative schemes or common law regimes govern, and
liability is imposed either on the basis of fault or in a manner similar to that
convention. We believe that our P&I insurance will cover the liability under
the plan adopted by the IMO.
In 2001, the IMO adopted the
International Convention on Civil Liability for Bunker Oil Pollution Damage, or
the Bunker Convention, which imposes strict liability on ship owners for
pollution damage in jurisdictional waters of ratifying states caused by
discharges of bunker oil. The Bunker Convention also requires registered owners
of ships over a certain size to maintain insurance for pollution damage in an
amount equal to the limits of liability under the applicable national or
international limitation regime (but not exceeding the amount calculated in
accordance with the Convention on Limitation of Liability for Maritime Claims of
1976, as amended). The Bunker Convention entered into force on November 21,
2008. We have made relevant arrangements and our entire fleet has been issued
with a certificate attesting that insurance is in force in accordance with the
insurance provisions of the convention.
IMO regulations also require owners and
operators of vessels to adopt Shipboard Marine Pollution Emergency Plans
(“SMPEPs”). Periodic training and drills for response personnel and for vessels
and their crews are required. The SMPEPs required for our vessels are in
place.
In addition, our operations are subject
to compliance with the International Bulk Chemical (“IBC”) Code, as required by
MARPOL and SOLAS for chemical tankers built after July 1, 1986, which
provides ship design, construction and equipment requirements and other
standards for the bulk transport of certain liquid chemicals. Under
October 2004 amendments to the IBC Code (implemented to meet recent
revisions to SOLAS and Annex II to MARPOL), some previously unrestricted
vegetable oils, including animal fats and marine oils, must be transported in
chemical tankers meeting certain double-hull construction requirements. Our
vessels may transport such cargoes but are restricted as to the volume they are
able to transport per cargo tank. This restriction does not apply to edible
oils. In addition, those amendments require re-evaluation of the categorization
of certain products with respect to their properties as marine pollutants, as
well as related ship type and carriage requirements. Where necessary pollution
data is not supplied for those products missing such data, it is possible that
the bulk carriage of such products will be prohibited.
In 2001, the IMO adopted the
International Convention on the Control of Harmful Anti-fouling Systems on Ships
(the “Anti-fouling Convention”) which prohibits the use of organotin compound
coatings to prevent the attachment of mollusks and other sea life to the hulls
of vessels. The Anti-fouling Convention came into force on September 17, 2008
and applies to vessels constructed prior to January 1, 2003 that have not been
in dry-dock since that date. The effective date of the Anti-fouling Convention
was January 1, 2008. Vessels of over 400 gross tons engaged in international
voyages must obtain an International Anti-fouling System Certificate and must
undergo a survey before the vessel is put into service or when the anti-fouling
systems are altered or replaced. We have obtained Anti-Fouling System
Certificates for all of our vessels that are subject to the Anti-Fouling
Convention and do not believe that maintaining such certificates will have an
adverse financial impact on the operation of our vessels.
Greenhouse
Gas Regulation
In February 2005, the Kyoto Protocol to
the United Nations Framework Convention on Climate Change, or Kyoto Protocol,
entered into force. Pursuant to the Kyoto Protocol, adopting countries are
required to implement national programs to reduce emissions of certain gases,
generally referred to as greenhouse gases, which are suspected of contributing
to global warming. Currently, the emissions of greenhouse gases from
international shipping are not subject to the Kyoto Protocol. However, a new
treaty may be adopted in the future that includes restrictions on shipping
emissions. The European Union also has indicated that it intends to propose an
expansion of the existing European Union emissions trading scheme to include
emissions of greenhouse gases from vessels. In the United States, the EPA is
considering a petition from the California Attorney General to regulate
greenhouse gas emissions from ocean-going vessels. In addition, climate change
initiatives are being considered in the U.S. Congress. Any passage of climate
control legislation or other regulatory initiatives by the IMO, European Union,
the U.S. or other countries where we operate that restrict emissions of
greenhouse gases could have a financial impact on our operations that we cannot
predict with certainty at this time.
Vessel
Security Regulations
Since the terrorist attacks of
September 11, 2001, there have been a variety of initiatives intended to
enhance vessel security. On November 25, 2002, the Maritime Transportation
Security Act of 2002 (“MTSA”) came into effect. To implement certain portions of
the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring
the implementation of certain security requirements aboard vessels operating in
waters subject to the jurisdiction of the United States.
Similarly, in December 2002,
amendments to SOLAS created a new chapter of the convention dealing specifically
with maritime security. The new chapter went into effect in July 2004, and
imposes various detailed security obligations on vessels and port authorities,
most of which are contained in the newly created International Ship and Port
Facilities Security (“ISPS”) Code. Among the various requirements
are:
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on-board
installation of automatic identification systems to enhance
vessel-to-vessel and vessel-to-shore
communications;
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on-board
installation of ship security alert
systems;
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the
development of vessel security plans;
and
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compliance
with flag state security certification
requirements.
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The U.S. Coast Guard regulations,
intended to align with international maritime security standards, exempted
non-U.S. vessels from MTSA vessel security measures provided such vessels had on
board, by July 1, 2004, a valid International Ship Security Certificate
that attests to the vessel’s compliance with SOLAS security requirements and the
ISPS Code. We have implemented the various security measures addressed by the
MTSA, SOLAS and the ISPS Code and have ensured that our vessels are compliant
with all applicable security requirements.
C.
Organizational Structure
Please also see Exhibit 8.1 to this
Annual Report for a list of our significant subsidiaries as of December 31,
2009.
D.
Property, Plants and Equipment
Other than our vessels, we do not have
any material property.
None.
You should read the following
discussion of our financial condition and results of operations in conjunction
with our audited consolidated and combined Financial Statements for the years
ended December 31, 2009, 2008 and 2007 and related notes included elsewhere in
this Annual Report. Among other things, the Financial Statements include more
detailed information regarding the basis of presentation for the following
information. The Financial Statements have been prepared in accordance with U.S.
GAAP and are presented in thousands of U.S. Dollars.
A.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We are an international owner of
product tankers formed in January 2007 by Capital Maritime, an international
shipping company with a long history of operating and investing in the shipping
market. Our fleet currently consists of 18 double-hull, high specification
tankers with an average age of approximately 3.5 years as of December 31, 2009.
Eight of our vessels were transferred to us by Capital Maritime at the time of
our IPO in April 2007. At the time of the IPO we also entered into an agreement
to acquire seven newbuildings from Capital Maritime t fixed prices which were
delivered during 2007 and 2008. We also acquired three additional vessels from
Capital Maritime which we had not agreed to purchase at the time of our IPO, two
of which were purchased in part by issuing equity to Capital Maritime. In April
2009, we acquired two additional vessels from Capital Maritime’s fleet, which
had been identified under our omnibus agreement with Capital Maritime, in
exchange for one vessel from our IPO fleet and one of the seven newbuildings
purchased subsequently. Both acquired vessels are under time-charters to BP
Shipping expiring in 2011. As of December 31, 2009, Capital Maritime owned a
46.6% interest in us, including 11,304,651 common units and a 2% interest in us
through its ownership of our general partner.
Notwithstanding
the current economic downturn the duration and the long term effect of which is
not possible to predict, our primary business objective is to pay a sustainable
quarterly distribution per unit and to increase our distributions over time,
subject to shipping, charter and financial market developments. Please see “Item
4: Information on the Partnership—Business Overview—Recent Developments” for our
current guidance on target distributions for 2010. Our strategy focuses on
maintaining and growing our cash flows, continuing to grow our product tanker
fleet and maintaining and building on our ability to meet rigorous industry and
regulatory safety standards. We believe that the combination of the medium to
long-term nature of our charters and our agreement with Capital Ship Management
for the commercial and technical management of our vessels, which provides for a
fixed management fee for an initial term of approximately five years from when
we take delivery of each vessel, and that fact that we currently have no capital
commitments to purchase or build further vessels will provide us with a base of
stable cash flows in the medium term. As our vessels come up
for rechartering we will seek to redeploy them at contracts that reflect our
expectations of the market conditions prevailing at the time. We intend to
continue to evaluate potential opportunities to acquire both newbuildings and
second-hand vessels from Capital Maritime and from third parties and leverage
the expertise and reputation of Capital Maritime in a prudent manner that is
accretive to our unitholders and to long-term distribution growth, subject to
approval of our board of directors and overall market
conditions.
Please see “—Factors Affecting our Future
Results of Operations” below.
Please
also see “Item 4: Business Overview” for a description of the historical
development of our company and a description of the significant acquisitions and
financial events to date, including a description of the exceptional
non-recurring distribution paid in January 2009 and “Item 4B—Our Fleet” for more
information regarding our vessels, including dates of acquisition and
acquisition prices and information on their charters, “Item 5B:
Operating and Financial Review and Prospects—Liquidity and Capital Resources—Net
Cash Used in Investing Activities” and Note 1 (Basis of Presentation and General
Information) to our Financial Statements included herein for more information
regarding any acquisitions, including a detailed explanation of how they were
accounted for and “Item 7B: Related-Party Transactions” for a
description of the terms of certain transactions.
Our
Charters
We generate revenues by charging our
customers for the use of our vessels to transport their products. Historically,
we have provided services to our customers under time or bareboat charter
agreements. Currently, 17 of the 18 vessels in our fleet are under medium to
long-term time or bareboat charters with an average remaining term of
approximately 3.7 years as of December 31, 2009. Currently, 75% of our charter
revenues are fixed for the year ending December 31, 2010. In addition, of our 11
time charters, 10 contain profit-sharing arrangements. One of our vessels, the
M/T Attikos, is currently trading in the spot market. We may in the future operate
additional vessels in the spot market until the vessels have been chartered
under appropriate medium to long-term charters.
Our time chartered vessels are under
contracts with BP Shipping Limited, Morgan Stanley Capital Group Inc., Shell
International Trading & Shipping Company Ltd. and subsidiaries of Overseas
Shipholding Group Inc. BP Shipping Limited, Morgan Stanley Capital Group Inc.
and subsidiaries of Overseas
Shipholding Group Inc accounted for 59%, 22% and 12% of our revenues
respectively for the year ended December 31, 2009, compared to 54%, 33% and 0%
of our revenues respectively for the year ended December 31, 2008 and 58%, 24%
and 0% of our revenues for the year ended December 31, 2007. The loss of any
significant customer or a substantial decline in the amount of services
requested by a significant customer could harm our business, financial condition
and results of operations. In the future, as our fleet expands, we also expect
to enter into charters with new charterers in order to maintain a portfolio that
is diverse from a customer, geographic and maturity perspective.
Please read “Item 4B: Business
Overview—Our Fleet”, “Item 4B: Business Overview—Our Charters” and “Item 4B:
Business Overview—Profit Sharing Arrangements” for additional details regarding
these types of contractual relationships as well as a detailed description of
the length and daily charter rate of our charters and information regarding the
calculation of our profit share arrangements.
Accounting
for Acquisition and Disposal of Vessels
All vessels we acquire or have acquired
from Capital Maritime are or were transferred to us at historical cost and
accounted for as a combination of entities under common control or a transfer of
equity interest between entities under common control. All assets, liabilities
and equity, other than the relevant vessel, related charter agreement and
related permits, of these vessels’ ship-owning companies were retained by
Capital Maritime. In addition, for vessel-owning companies that had an operating
history prior to such acquisition, transfers of equity interests between
entities under common control were accounted for as if the transfer occurred at
the beginning of the period, and prior years were retroactively adjusted to
furnish comparative information similar to the pooling method.
Following
the accounting guidance for the Impairment or Disposal of Long-Lived Assets we
deconsolidated from our Financial Statements as of the date of the transfer to
Capital Maritime the vessel-owning companies of the M/T Assos and the M/T
Atrotos. Results of operations, cash flows, and balances of these
vessels prior to their transfer to Capital Maritime are included in our
Financial Statements.
For
detailed information on how we have accounted for specific transfers of vessels
please see Note 1 (Basis of Presentation and General Information) to our Financial Statements included herein.
Factors
Affecting Our Future Results of Operations
We believe the principal factors that
will affect our future results of operations are the economic, regulatory,
financial, credit, political and governmental conditions that affect the
shipping industry generally and that affect conditions in countries and markets
in which our vessels engage in business. We continue to face a major
global economic slowdown as well as a severe deterioration in the banking and
credit markets which is expected to continue to negatively impact world trade
and which may affect our ability to obtain financing as well as further impact
the values of our vessels and the charters we are able to obtain for our
vessels. Other key factors that will be fundamental to our business, future
financial condition and results of operations include:
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the
demand for seaborne transportation
services;
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levels
of oil product demand and
inventories;
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charter
hire levels and our ability to re-charter our vessels as their current
charters expire;
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supply
of product and crude oil tankers and specifically the number of
newbuildings entering the world tanker fleet each
year;
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the
ability to increase the size of our fleet and make additional acquisitions
that are accretive to our
unitholders;
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the
ability of Capital Maritime’s commercial and chartering operations to
successfully employ our vessels at economically attractive rates,
particularly as our fleet expands and our charters
expire;
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our
ability to benefit from new maritime regulations concerning the phase-out
of single-hull vessels and the more restrictive regulations for the
transport of certain products and
cargoes;
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our
ability to comply with the covenants in our credit facilities, including
covenants relating to the maintenance of asset value
ratios;
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the
effective and efficient technical management of our
vessels;
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Capital
Maritime’s ability to obtain and maintain major international oil company
approvals and to satisfy their technical, health, safety and compliance
standards; and
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the
strength of and growth in the number of our customer relationships,
especially with major international oil companies and major commodity
traders.
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In addition to the factors discussed
above, we believe certain specific factors have impacted, and will continue to
impact, our results of operations. These factors include:
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the
charterhire earned by our vessels under time charters and bareboat
charters;
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our
ability to recharter our vessels on medium to long term charters at
competitive rates;
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our
ability to comply with the covenants in our credit facilities as the
recent decline in asset values and charter rates may limit our ability to
pursue our business strategy;
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the
prevailing spot market rates and the number of our vessels which we
operate on the spot market;
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our
access to debt, and equity and the cost of such capital, required to
acquire additional vessels and/or to implement our business
strategy;
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our
ability to sell vessels at prices we deem
satisfactory;
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our
level of debt and the related interest expense and amortization of
principal; and
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the
level of any distribution on our common
units.
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Please read “Risk Factors” above for a
discussion of certain risks inherent in our business.
Factors
to Consider When Evaluating Our Results
Our historical results of operations,
cash flows are not indicative of results of operations and cash flows to be
expected from any future period. Specifically, it is important to consider the
following factors when evaluating our results of operations:
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Financial
Statements. Our
Financial Statements include the results of operations of different
numbers of vessels in each year and have been retroactively adjusted to
reflect the results of operations of all non-contracted vessels we
acquired as if they were owned by us for the entire period from their
delivery to Capital Maritime. In certain cases, the Financial Statements
have also been adjusted to reflect cash-flow items prior to delivery of
the relevant vessel to Capital Maritime. In addition, the vessel-owning
companies of the M/T Assos and the M/T Atrotos were deconsolidated from
our accounts as of the date of the transfer to Capital Maritime in April
2009. Results of operations, cash flows, and balances of these vessels
prior to their transfer to Capital Maritime were included in our
consolidated and combined financial statements. Please read Note 1 of our
Financial Statements included herein for a description of the financial
treatment of vessel acquisitions and
dispositions.
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Limited Operations.
Vessels that are acquired or delivered to us or to Capital Maritime are
included in our results of operations, cash flows and financial position
from the date of incorporation of the relevant vessel-owning company or,
in the case of the seven vessels we contracted to acquire at the time of
our IPO which were delivered during 2007 and 2008, as of their delivery
date from the shipyard to Capital Maritime and us. Results of operations,
cash flows and financial position of vessels that have been disposed of
are included in our Financial Statements up to the date of their disposal.
As a result of this accounting treatment, our Financial Statements may
include results of operations of more vessels than actually comprised our
fleet during the relevant year. Please read “—Accounting for Deliveries of
Vessels” above and Note 1 of our Financial Statements included herein for
a description of the financial treatment of vessel acquisitions. The table
below shows the periods for which the financial position results of
operations and cash flows for each vessel-owning subsidiary are included
in our Financial Statements.
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LIMITED
OPERATIONS
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Vessel
included in Consolidated and Combined Financial Statements for the year
ended December 31,
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Vessel
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Incorporation
date
of VOC* |
Date
acquired by
Capital Maritime |
Date
acquired by us
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2009
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2008
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2007
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M/T
Atlantas (1)
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01/16/2007
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04/26/2006
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04/04/2007
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X
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X
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X
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M/T
Assos (1), (4)
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09/16/2003
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05/17/2006
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04/04/2007
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Up
to April 6
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X
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X
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M/T
Aktoras (1)
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03/18/2004
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07/12/2006
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04/04/2007
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X
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X
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X
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M/T
Agisilaos (1)
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08/27/2003
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08/16/2006
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04/04/2007
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X
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X
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X
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M/T
Arionas (1)
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10/10/2003
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11/02/2006
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04/04/2007
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X
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X
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X
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M/T
Avax (1)
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11/10/2003
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01/12/2007
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04/04/2007
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X
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X
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X
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M/T
Aiolos (1)
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02/10/2004
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03/02/2007
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04/04/2007
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X
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X
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X
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M/T
Axios (1)
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09/12/2003
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02/28/2007
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04/04/2007
|
X
|
X
|
X
|
||||||
|
M/T Atrotos
(2), (5)
|
02/10/2004
|
05/08/2007
|
05/08/2007
|
Up
to April 12
|
X
|
X
|
||||||
|
M/T
Akeraios (2)
|
02/11/2004
|
07/13/2007
|
07/13/2007
|
X
|
X
|
X
|
||||||
|
M/T
Apostolos (2)
|
02/03/2004
|
09/20/2007
|
09/20/2007
|
X
|
X
|
X
|
||||||
|
M/T
Anemos I (2)
|
05/26/2004
|
09/28/2007
|
09/28/2007
|
X
|
X
|
X
|
||||||
|
M/T
Attikos (3)
|
07/08/2004
|
01/20/2005
|
09/24/2007
|
X
|
X
|
X
|
||||||
|
M/T
Alexandros II (2)
|
12/29/2003
|
01/29/2008
|
01/29/2008
|
X
|
X
|
-
|
||||||
|
M/T
Amore Mio II (3)
|
02/07/2006
|
07/31/2007
|
03/27/2008
|
X
|
X
|
X
|
||||||
|
M/T
Aristofanis (3)
|
05/29/2007
|
06/02/2005
|
04/30/2008
|
X
|
X
|
X
|
||||||
|
M/T
Aristotelis II (2)
|
02/03/2004
|
06/17/2008
|
06/17/2008
|
X
|
X
|
-
|
||||||
|
M/T
Aris II (2)
|
02/07/2006
|
08/20/2008
|
08/20/2008
|
X
|
X
|
-
|
||||||
|
M/T
Agamemnon II (3), (4)
|
01/24/2006
|
11/24/2008
|
04/07/2009
|
X
|
X
|
X
|
||||||
|
M/T
Ayrton II (3), (5)
|
07/14/2006
|
04/10/2009
|
04/13/2009
|
X
|
X
|
X
|
||||||
|
|
*
|
VOC:
Vessel-Owning Subsidiary
|
|
|
(1)
|
Initial
Vessels. The Financial Statements have been retroactively adjusted to
reflect their financial position, results of operations and cash flows as
of the incorporation date of their respective vessel-owning
companies.
|
|
|
(2)
|
Committed
Vessels. These vessels are newbuildings which were delivered directly to
us from Capital Maritime on their delivery dates from the shipyards and
have no operating history. As such, there is no information to
retroactively restate that should be considered and the results of
operations are presented in the Financial Statements since their delivery
dates.
|
|
|
(3)
|
Non-Contracted
Vessels. The Financial Statements have been retroactively adjusted to
reflect their financial position, results of operations and cash flows as
of the incorporation date of their respective vessel-owning
companies.
|
|
|
(4)
|
On
April 7, 2009 the M/T Assos was exchanged for the M/T Agamemnon
II.
|
|
|
(5)
|
On
April 13, 2009 the M/T Atrotos was exchanged for the M/T Ayrton
II.
|
|
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●
|
Different Sources of
Revenues. A portion of the revenues generated for the
period ended April 3, 2007 was derived from charters with different terms
than the charters that are currently in
place.
|
|
|
●
|
Different Structure of
Operating Expenses. On April 3, 2007, we entered into a management
agreement with Capital Ship Management pursuant to which Capital Ship
Management agreed to provide commercial and technical management services
to us for an initial term of approximately five years from when we take
delivery of each vessel. Under the agreement we pay Capital Ship
Management a fixed daily fee per vessel for our time chartered
vessels which covers vessel operating expenses, including crewing, repairs
and maintenance, insurance and the cost of the next scheduled
special/intermediate surveys for each vessel, and related drydocking, as
applicable, and a fixed daily fee of $250 per bareboat chartered vessel.
Capital Ship Management is also entitled to supplementary remuneration
for additional fees and costs (as defined in our management
agreement) of any direct and indirect expenses it reasonably incurs in
providing these services which may vary from time to time, and which
includes, amongst others, certain costs associated with the vetting of our
vessels, repairs related to unforeseen extraordinary events and insurance
deductibles. Operating expenses for any vessel in our fleet prior to its
acquisition by us represent actual costs incurred by the vessel-owning
subsidiaries and Capital Ship Management in the operation of the vessels
that were operated as part of Capital Maritime’s fleet, including costs
associated with any surveys undergone by vessels, including the relevant
dry-docking.
|
|
|
●
|
Different Structure of General
and Administrative Expenses. Since our IPO we have
incurred certain general and administrative expenses as a publicly traded
limited partnership that we had not previously incurred.
|
|
|
●
|
Different Financing
Arrangements. The vessels delivered to Capital Maritime during
2005, 2006 and 2007 were purchased under financing arrangements with terms
that differ significantly from those of the credit facilities currently in
place which we have used to finance the acquisition of the additional
vessels we have purchased from Capital Maritime since our IPO.
Importantly, these credit facilities are non-amortizing until June 2012
and March 2013, respectively. In addition, the historical bank debt bore
interest at floating rates while we have entered into interest rate swap
agreements to fix the LIBOR portion of our interest rate in connection
with the debt drawn down under our credit facilities. For a description of
our non-amortizing revolving credit facilities, please see “—Liquidity and
Capital Resources—Revolving Credit Facilities”
below.
|
|
|
●
|
The Size of our Fleet
Continues to Change. At the time of our IPO, our fleet consisted of
eight vessels and we contracted to purchase an additional seven vessels
from Capital Maritime. Between May and
September 2007 we took delivery of four of the contracted vessels and also
acquired the M/T Attikos from Capital Maritime which we had not contracted
to purchase at the time of our offering. All of the vessels delivered
between May and September 2007 were under long-term charters at the time
of their delivery. The remaining
three contracted vessels were delivered between January and August 2008.
During the first half of 2008 we acquired two additional vessels from
Capital Maritime which we had not contracted to purchase at the time of
our IPO and during the first half of 2009 we acquired an additional two
vessels from Capital Maritime’s fleet identified under our omnibus
agreement with Capital Maritime in exchange for one vessel from our IPO
fleet and one of the seven newbuildings purchased and a cash consideration
of $8.0 million. We intend to continue to evaluate potential acquisitions
in a prudent manner that is accretive to our distributable cash flow per
unit.
|
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008
Results
for the years ended December 31, 2009 and December 31, 2008, differ primarily
due to the lower profit sharing revenues earned during 2009 compared to those
earned during 2008 ($0.7 million in 2009 compared to $18.5 million in 2008) and
higher interest expenses ($32.1 million in 2009 compared to $25.6 million in
2008) due to the higher margin, which were partly offset by the higher average
number of vessels in our fleet for 2009 (18 in 2009 compared to 16.8 in 2008).
The results for the year ended December 31, 2009 have been retroactively
adjusted to reflect the results of operations from the M/T Agamemnon II and the
M/T Ayrton II which were operated as part of the Capital Maritime fleet prior to
their acquisition by us in April 2009. The results for the year ended December
31, 2008 have been retroactively adjusted and reflect the results of operations
and cash flows of the M/T Ayrton II, M/T Agamemnon II, M/T Amore Mio II and the
M/T Aristofanis which were operated as part of Capital Maritime’s fleet prior to
their acquisition by us in April 2009, March and April 2008, respectively. For
the years ended December 31. 2009 and 2008 net income attributable to vessels
operations as part of the Capital Maritime fleet amounted to $0.8 million and
$(1.0) million respectively.
Revenues
Time and bareboat charter revenues
amounted to approximately $123.5 million for the year ended December 31, 2009,
as compared to $132.7 million for the year ended December 31, 2008.
Time and bareboat charter revenues are mainly comprised of the charter hire
received from unaffiliated third-party customers and are affected by the number
of days our vessels operate, the amount of profit sharing revenues and the
average number of vessels in our fleet. Please read “Item 4B: Business
Overview—Our Fleet” and “—Our Charters” for information about the charters on
our vessels, including daily charter rates.
Voyage
Expenses
Voyage expenses amounted to $1.1
million for both years ended December 31, 2009 and 2008. Excluding voyage
expenses incurred by the M/T Amore Mio II, the M/T Aristofanis, the M/T
Agamemnon II and the M/T Ayrton II during the period they were part of Capital
Maritime’s fleet, voyage expenses for the year ended December 31, 2009 amounted
to $1.0 million, and consisted primarily of commissions payable under our
charter agreements, as compared to $0.9 million for the year ended December 31,
2008.
Voyage
expenses are direct expenses to voyage revenues and primarily consist of
commissions, Voyage costs, except for commissions, are paid for by the charterer
under time and bareboat charters. In the case of our time charters with Morgan
Stanley Capital Group Inc. and bareboat charter with Overseas Shipholding
Group, Inc., the charterer is also responsible for commissions. Increases in
voyage expenses are primarily attributable to increases in the average number of
vessels in our fleet.
Vessel
Operating Expenses
For the year ended December 31,
2009, our vessel operating expenses amounted to approximately $30.6 million, of
which $30.1 million was due to our manager, including $3.0 million
in additional fees and costs (as defined in our management
agreement) relating to
direct and indirect expenses incurred by Capital Ship Management in the
management of our vessels, including, among others, certain costs associated
with the vetting of our vessels, repairs related to unforeseen events and
insurance deductibles. Vessel operating expenses for the year
ended December 31, 2009, mainly include management fees payable to Capital Ship
Management pursuant to our management agreement and actual costs incurred by the
M/T Agamemnon II and the M/T Ayrton II which were operated as part of Capital
Maritime’s fleet prior to their acquisition by us in April
2009
For the year ended December 31,
2008, our vessel operating expenses amounted to approximately $29.5 million, of
which $25.7 million was paid to our manager, including $1.0 million
in additional fees and costs under our management agreement. Vessel
operating expenses for the year ended December 31, 2008, mainly include
management fees payable to Capital Ship Management pursuant to our management
agreement and actual costs incurred by the M/T Amore Mio II, M/T Aristofanis and
M/T Agamemnon II which were operated as part of Capital Maritime’s fleet prior
to their acquisition by us in March and April 2008 and April 2009,
respectively.
General
and Administrative Expenses
General
and administrative expenses amounted to $2.9 million for the year ended December
31, 2009, compared to $2.8 million for the year ended December 31, 2008. General
and administrative expenses include board of directors’ fees and expenses, audit
fees, and other fees related to the expense of being a publicly traded
partnership.
Depreciation
and Amortization
Depreciation and amortization of fixed
assets amounted to $28.3 million for the year ended December 31, 2009 as
compared to $25.2 million for the year ended December 31, 2008 and is
primarily due to the increased number of vessels in our fleet.
This amount primarily represents
depreciation on 18 vessels for the whole year 2009. For 2008 this amount
primarily represents depreciation on 15 vessels for the whole year and on three
vessels for a part of the year commencing from their delivery dates in 2008.
Depreciation is expected to increase if the number
of vessels in our fleet increases.
Other
Expense, Net
Other expense, net for the year ended
December 31, 2009, was approximately $(30.6) million as compared to
$(24.4) million for the year ended December 31, 2008. The increase is
primarily due the higher average level of debt outstanding during the year ended
December 31, 2009 as compared to the year ended December 31, 2008, the higher
interest rates charged under our amended credit facilities effective since June
30, 2009 and the higher funding costs incurred by our lending banks which we
compensated them for.
The 2009 amount represents interest
expense and amortization of financing charges and bank charges of $(32.1)
million, and interest income for the period of $1.5 million. The 2008 amount
represents interest expense and amortization of financing charges and bank
charges of $(25.6) million. Interest income for the period was $1.3 million and
foreign currency loss was $(0.1) million.
Net
Income
Net income for the year ended
December 31, 2009, amounted to $30.0 million as compared to $49.7
million for the year ended December 31, 2008. For an explanation of why our
historical net income is not indicative of net income to be expected in future
periods, please refer to the discussion under “— Factors to Consider When
Evaluating Our Results” and “— Results of
Operations” above.
Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
Results for the years ended December
31, 2008 and December 31, 2007, differ primarily due to the higher
average number of vessels in our fleet for 2008 (16.8 in 2008
compared to 11.6 in 2007) and the higher profit sharing revenues earned during
each year ($18.5 million in 2008 compared to $6.0 million in 2007). The results
for both years have been retroactively adjusted and reflect the results of
operations from the M/T Amore Mio II and the M/T Aristofanis for the periods
that they were part of Capital Maritime’s fleet prior to their acquisition by us
in March and April 2008, respectively. The results for the year ended December
31, 2008, have been further retroactively adjusted to reflect revenues from the
M/T Agamemnon II for the period it was part of Capital Maritime’s fleet prior to
its acquisition by us in April 2009 and the results for the year ended December
31, 2007, have also been further retroactively adjusted to reflect revenues from
the M/T Attikos for the periods it was part of Capital Maritime’s fleet prior to
its acquisition by us in September 2007. For the years ended December 31. 2008
and 2007 net income attributable to vessels’ operations as part of Capital
Maritime fleet amounted to $(1.0) million and $9.4 million
respectively.
Revenues
Time and bareboat charter revenues
amounted to approximately $132.7 million for the year ended December 31, 2008,
as compared to $86.5 million for the year ended December 31, 2007. For
the year ended December 31, 2007, the amount also included freight revenues.
Time and bareboat charter revenues are mainly comprised of the charter hire
received from unaffiliated third-party customers and are affected by the number
of days our vessels operate and the average number of vessels in our fleet.
Please read “Item 4B: Business Overview—Our Fleet” and “—Our Charters” for
information about the charters on our vessels, including daily charter
rates.
Voyage
Expenses
Voyage
expenses amounted to $1.1 million for the year ended December 31, 2008, as
compared to $3.6 million for the year ended December 31, 2007. The higher
expenses in 2007 were primarily due to the expenses incurred under the voyage
charters performed by the M/T Amore Mio II in 2007 while it was still part of
Capital Maritime’s fleet. For the year ended December 31, 2008, voyage expenses,
excluding voyage expenses incurred by the non-contracted vessels M/T Attikos,
M/T Amore Mio II, M/T Aristofanis and M/T Agamemnon II during the period they
were part of Capital Maritime’s fleet, amounted to $0.9 million and consisted
primarily of commissions payable under our charter agreements, as compared to
$0.4 million for the period from April 4, 2007 to December 31,
2007.
Voyage
expenses are direct expenses to voyage revenues and primarily consist of
commissions, port expenses, canal dues and bunkers. Voyage costs, except for
commissions, are paid for by the charterer under time and bareboat charters. In
the case of our time charters with Morgan Stanley Capital Group Inc. and
bareboat charter with Overseas Shipholding Group, Inc., the charterer is also
responsible for commissions. Increases to voyage expenses are primarily
attributable to increases in the average number of vessels in our
fleet.
Vessel
Operating Expenses
For the
year ended December 31, 2008, our vessel operating expenses amounted to
approximately $29.5 million, of which $25.7 million was paid to our manager and
include $1.0 million in additional fees and costs (as defined in our
management agreement) relating to direct and indirect expenses incurred
by Capital Ship Management in the management of our vessels, including, among
others, certain costs associated with the vetting of our vessels, repairs
related to unforeseen extraordinary events and insurance deductibles. Vessel
operating expenses for the year ended December 31, 2008, represent management
fees payable to Capital Ship Management pursuant to our management agreement
amounted to $24.3 million and actual costs incurred by the two vessels which
were operated as part of Capital Maritime’s fleet prior to their acquisition by
us in March and April 2008.
For the year ended December 31, 2007,
vessel operating expenses amounted to approximately $19.0 million, of which
$12.7 million was paid to the manager. For the year ended December 31,
2007, vessel operating expenses represent management fees payable to Capital
Ship Management pursuant to our management agreement amounted to $11.6 million
and actual costs incurred by eleven vessels which were
operated as part of Capital Maritime’s fleet prior to their acquisition by us.
Increases to vessel operating expenses are primarily attributable to increases
in the average number of vessels in our fleet.
General
and Administrative Expenses
General and administrative expenses
amounted to $2.8 million for the year ended December 31, 2008, compared to $1.5
million for the year ended December 31, 2007. The increase was mainly due to the
higher number of days that we operated as a publicly traded company in 2008. We
did not incur any similar general and administrative expenses for the period
prior to April 4, 2007, the date we completed our IPO. General and
administrative expenses include board of directors’ fees and expenses, audit
fees, and other fees related to the expenses of the publicly traded
company.
Depreciation
and Amortization
Depreciation and amortization of fixed
assets amounted to $25.2 million for the year ended December 31, 2008 as
compared to $15.4 million for the year ended December 31, 2007 and is
primarily due to the increased number of vessels in our fleet.
This amount primarily represents
depreciation on 15 vessels for the whole year and on three vessels for a part of
the year commencing from their delivery dates in 2008. The amount of
depreciation for the year ended December 31, 2007 represents depreciation on
seven vessels for the whole year and on eight vessels for a part of the year
commencing from their delivery dates in 2007. Depreciation is expected to increase if the number of
vessels in our fleet increases.
Other
Expense, Net
Other expense, net for the year ended
December 31, 2008, was approximately $(24.4) million as compared to
$(16.2) million for the year ended December 31, 2007. The increase is
primarily due to the higher amounts outstanding under our credit facilities
during the year ended December 31, 2008 as compared to the year ended December
31, 2007.
The 2008 amount represents interest
expense and amortization of financing charges and bank charges of $(25.6)
million, interest income for the period of $1.3 million and foreign currency
loss of $(0.1) million. The 2007 amount represents interest expense and
amortization of financing charges and bank charges of $(16.9) million of which
$(3.8) million represent a loss from the transfer of interest rate swap
agreements entered into by Capital Maritime prior to April 4, 2007 and acquired
by us on that date. Interest income for the period was $0.7
million.
Net
Income
Net income for the year ended
December 31, 2008, amounted to $49.7 million as compared to $31.0
million for the year ended December 31, 2007. For an explanation of why our
historical net income is not indicative of net income to be expected in future
periods, please refer to the discussion under “— Factors to Consider When
Evaluating Our Results” and “— Results of
Operations” above.
B.
Liquidity and Capital Resources
As at December 31, 2009, total cash and
cash equivalents were $3.6 million, short term investments were $30.4 million,
restricted cash was $4.5 million, and total liquidity including cash and undrawn
long-term borrowings was $284.5 million. Short term investments represent
cash in time deposits in excess of three months.
As at December 31, 2008, total cash and
cash equivalents were $43.1 million, short term investment was $1.1 million,
restricted cash was $4.5 million, and total liquidity including cash and undrawn
long-term borrowings was $294.7 million. The decrease in total liquidity in
2009 as compared to 2008 is primarily due to the payment of the exceptional
non-recurring distribution of $1.05 per unit in February 2009.
We anticipate that our primary sources
of funds for our liquidity needs will be cash flows from operations. As our
vessels come up for rechartering, depending on the prevailing market rates, we
may not be able to recharter them at levels similar to their current charters
which may affect our future cash flows from operations, Generally, our long-term
sources of funds will be from cash from operations, long-term bank borrowings
and other debt or equity financings. Because we distribute all of our available
cash, we expect that we will rely upon external financing sources, including
bank borrowings and the issuance of debt and equity securities, to fund any
acquisitions and expansion and investment capital expenditures, including
opportunities we may pursue under the omnibus agreement with Capital Maritime or
acquisitions from third parties.
As at December 31, 2009, we had $246.0
million in undrawn amounts under our credit facilities unchanged from the year
ended December 31, 2008.
Total Partners’ Capital / Stockholders’
Equity as of December 31, 2009, amounted to $157.1 million, which reflects a
reduction of $36.8 million from the year ended December 31, 2008. This decrease
is due to the following:
|
|
○
|
Partner’s
Capital - A decrease in Partner’s Capital by $15.1 million is due to the
payment of $70.5 million in distributions during the year, the unrealized
gain of $10.5 million on interest rate swaps, net income in the amount of
$29.2 and an increase in the amount of $15.7 million which is the effect
on partner’s capital from the exchange of two vessels with the
sponsor.
|
|
|
○
|
Stockholder’s
Equity – Elimination of Stockholder’s Equity following the acquisition of
the shares of the vessel owning companies of the M/T Agamemnon II and M/T
Ayrton II by us.
|
Notwithstanding the continuing economic
downturn, the duration and long term effects of which are not possible to
predict and subject to shipping, charter and financial market developments, we
believe that our working capital will be sufficient to meet our existing
liquidity needs for at least the next 12 months.
|
|
Cash
Flows
|
Our cash flow statements
|
|
○
|
for
the period from January 1, 2007 to April 3, 2007, for the vessel-owning
subsidiaries comprising our fleet at the time of our
IPO;
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|
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○
|
for
the period from January 1, 2007 to September 23, 2007, March 26, 2008 and
April 29, 2008 for the M/T Attikos, the M/T Amore Mio II and
the M/T Aristofanis, respectively;
and
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|
|
○
|
for
the years ended December 31, 2007 and 2008 and the periods from January 1,
2009 to April 6, 2009 and to April 12, 2009 for the M/T Agamemnon II and
the M/T Ayrton II, respectively,
|
reflect
the operations of Capital Maritime, and include expenses incurred by Capital
Maritime while operating the vessels currently in our fleet, including expenses
associated with dry docking of the vessels, voyage expenses, repayment of loans
and the incurrence of indebtedness for the periods that our vessels were
operated as part of Capital Maritime’s fleet, as well as certain payments made
by Capital Maritime to shipyards prior to the delivery of the relevant vessel.
Please see the “Limited Operations” table included in “—Factors to Consider When
Evaluating Our Results” above for additional information.
The following table summarizes our cash
and cash equivalents provided by / (used in) operating, financing and investing
activities for the years presented in millions:
|
2009
|
2008
|
2007
|
||||||||||
|
Net
Cash Provided by Operating Activities
|
$ | 70.1 | $ | 75.1 | $ | 53.7 | ||||||
|
Net
Cash (Used in) Investing Activities
|
$ | (55.8 | ) | $ | (270.0 | ) | $ | (335.7 | ) | |||
|
Net
Cash Provided by / (Used in) Financing Activities
|
$ | (53.9 | ) | $ | 218.1 | $ | 300.7 | |||||
Net
Cash Provided by Operating Activities
Net cash provided by operating
activities declined to $70.1 million for the year ended December 31,
2009 from $75.1million for the year ended December 31, 2008 primarily due to
lower profit sharing revenues earned during the year and higher net interest
expenses which was partially offset by the receipt of the uncollected profit
share for the year ended December 31, 2008. The increase in net cash provided by
operating activities for the year ended December 31, 2008 as compared to the
year ended December 31, 2007 is primarily due to the higher number of average
vessels in our fleet and the increase in profit sharing revenues. For an
explanation of why our historical net cash provided by operating activities is
not indicative of net cash provided by operating activities to be expected in
future periods, please read “—Factors to Consider when Evaluating our Results”
and “— Results of Operations” above.
Net
Cash Used in Investing Activities
Cash is used primarily for vessel
acquisitions and changes in net cash used in investing activities are primarily
due to the number of vessels acquired in the relevant period. We expect to rely
primarily upon external financing sources, including bank borrowings and the
issuance of debt and equity securities as well as cash in order to fund any
future vessels acquisitions or expansion and investment capital
expenditures.
For the year ended December 31, 2009,
net cash used was comprised of:
|
|
●
|
$18.2
million, representing advances paid to the shipyard by Capital Maritime
for the construction of the M/T Ayrton II, which we acquired in April
2009;
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●
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$8.0
million representing the cash consideration we paid to Capital Maritime
under the terms of the agreements for the acquisition of the M/T Agamemnon
II and the M/T Ayrton II in exchange for the M/T Assos and the M/T
Atrotos, respectively.
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●
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$0.3
million, representing the amount paid for upgrading the M/T Attikos from
product to chemical tanker.
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●
|
($111.9)
million, representing the purchases of short term investments and $82.6
million representing maturities of short term investments. Short term
investments consist of cash time deposits with banks with maturities of
more than three months.
|
For the year ended December 31, 2008,
net cash used was comprised of:
|
|
●
|
$140.2
million, representing the net book value of the three vessels acquired
during 2008 (the M/T Alexandros II, the M/T Aristotelis II and the M/T
Aris II) at their respective delivery dates;
and
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●
|
$59.5
million, representing the purchase price as recorded in our Financial
Statements of the two non-contracted
vessels:
|
|
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○
|
$85.7
million for the M/T Amore Mio II reduced by $37.7 which represents the
value of the 2,048,823 common units issued at a price of $18.42 per common
unit to Capital Maritime to partially finance the acquisition;
and
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|
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○
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$21.6
million for the M/T Aristofanis reduced by $10.1million which represents
the value of the 501,308 common units issued at a price of $20.08 per
common unit to Capital Maritime to partially finance the
acquisition,
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|
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(Please
see Note 1 (Basis of Presentation and General Information) to our
Financial Statements included herein for more information regarding these
acquisitions, including a breakdown of the way they were funded);
and
|
|
|
●
|
$66.8
million, representing advances paid to the shipyard by Capital Maritime
for the construction of the two vessels we acquired in April 2009; the M/T
Agamemnon II and the M/T Ayrton II.
|
|
|
●
|
$1.2
million, representing the cost of the improvements to the M/T Aristofanis
paid by Capital Maritime
|
Of the remaining $2.3 million, $1.2
million represents restricted cash which is the minimum amount of free cash we
were required to maintain under our credit facilities for the period, and $1.1
million represents short term cash investments with original maturity from three
to twelve months.
For the year ended December 31, 2007,
$332.4 million of the net cash used was comprised of:
|
|
●
|
$77.6
million, representing advances to the shipyards paid by Capital Maritime
between January 1, 2007 and April 3, 2007 with respect to the construction
of three of the vessels in our initial fleet: the M/T Aiolos, the M/T Avax
and the M/T Axios; and
|
|
|
●
|
$166.1
million, representing the net book value at the time of their acquisition
by us of the M/T Attikos and of the four vessels we contracted to purchase
from Capital Maritime at the time of our IPO delivered between May and
September 2007: the M/T Atrotos, the M/T Akeraios, the M/T Anemos I and
the M/T Apostolos ; and
|
|
|
●
|
$88.1
million, representing the purchase price for the M/T Amore Mio II paid by
Capital Maritime to a third party in July
2007.
|
|
|
●
|
$0.6
million representing advances paid to the shipyard by Capital Maritime for
the construction of the M/T Agamemnon II and the M/T Ayrton II, which we
acquired in April 2009.
|
The remaining $3.3 million represents
restricted cash, which is the minimum amount of free cash we were required to
maintain under our credit facilities for the period.
Net
Cash Provided by Financing Activities
Net cash used in financing activities
amounted to $(53.9) million for the year ended December 31, 2009, as compared to
net cash provided by financing activities $218.1 million for the year ended
December 31, 2008. For the year ended December 31, 2007, net cash provided
by financing activities amounted to $300.7 million.
There were no proceeds from the
issuance of long-term debt for the year ended December 31, 2009 compared to
$199.5 million for the year ended December 31, 2008, and $305.1 million for
the year ended December 31, 2007. The proceeds for the year ended December 31,
2008 consisted of amounts drawn down under our two credit facilities. The
proceeds for the year ended December 31, 2007 consisted of $274.5 million from
our credit facility entered into in March 2007 and $30.6 million from a credit
facility entered into by the vessel-owning company prior to our IPO in order to
finance the construction of the M/T Axios.
There were no proceeds from long-term
debt due to related parties for the year ended December 31, 2009. For the year
ended December 31, 2008 such proceeds amounted to $112.8 million and related to
credit facilities entered into by Capital Maritime . For the year ended December
31, 2007, such proceeds amounted to $109.7 million and related to credit
facilities entered into by Capital Maritime to finance the construction of the
M/T Aiolos, the M/T Avax, as well as the acquisition of the M/T Amore Mio II in
July 2007.
There was no repayment of debt for the
year ended December 31, 2009 compared to $8.1 million for the year ended
December 31, 2008, which comprised of the repayment of the M/T Aristofanis’ loan
in April, 2008 by Capital Maritime. The repayment of debt amounted to $16.7
million for the year ended December 31, 2007 and comprised of installment
payments made prior to the IPO for vessels in our fleet, including the M/T
Aristofanis, and the repayment of M/T Attikos’ loan in September 2007 by Capital
Maritime.
Repayment of related-party debt for the
year ended December 31, 2009, amounted to $23.3 million, reflecting the debt
related to the M/T Agamemnon II and the M/T Ayrton II compared to $52.5 million
for the year ended December 31, 2008, which reflected the repayment of the M/T
Amore Mio II loan in March, 2008, by Capital Maritime. For the year ended
December 31, 2007 repayment of related-party debt was $2.4 million. Relevant
debt and related-party debt in the amount of $79.9 and $134.0 million
respectively for the year ended December 31, 2007, was repaid by Capital
Maritime from the proceeds from our IPO.
For the year ended December 31, 2009,
no transaction resulting in cash of purchase price over book value of vessels
took place. Between January and August 2008, we acquired the last three
contracted vessels from Capital Maritime: the M/T Alexandros II, the M/T
Aristotelis II and the M/T Aris II for a total purchase price of
$144.0 million. During the second and the third quarters of 2007 we
acquired five vessels from Capital Maritime: the M/T Atrotos, the M/T Akeraios,
the M/T Apostolos, the M/T Attikos and the M/T Anemos I, for a total purchase
price of $247.0 million. The excess of purchase price over book value of
the acquired vessels, $3.8 million in 2008 and $80.9 million in 2007, is
presented in our cash flow statement under net cash provided by financing
activities as we recognize transfers of net assets between entities under common
control at Capital Maritime’s basis in the net assets contributed.
For the
year ended December 31, 2009, capital contributions amounted to $40.6 million,
reflecting contributions made by Capital Maritime in order to finance part of
the construction cost of the M/T Ayrton II, compared to $12.1 million for the
year ended December 31, 2008, reflecting contributions made by Capital Maritime
in order to finance part of the construction cost of the M/T Agamemnon II and
the M/T Ayrton II. Capital contributions amounted to $31.3 million for the year
ended December 31, 2007 of which $13.7 million relates to contributions made by
Capital Maritime prior to the IPO in connection with the acquisition of three
initial vessels (the M/T Aiolos, M/T Avax and M/T Axios) and $17.6 million
related to contributions made by Capital Maritime in connection with its
acquisition of the M/T Amore Mio II in July 2007.
During the year ended December 31,
2009, we made distributions to our unitholders, including Capital Maritime, and
payments for incentive distribution rights to Capital Maritime in an aggregate
amount of $70.5 million reflecting distributions and incentive distribution
rights payments for the fourth quarter of 2008 and the first, second
and third quarters of 2009. During the year ended December 31, 2008, we made
distributions to our unitholders of $39.9 million. Following completion of our
IPO on April 4, 2007, we paid a $25.0 million cash dividend to Capital Maritime
and also made distributions to unitholders in an aggregate amount of $17.0
million for the second and third quarters of 2007. Please see “Item 4A:
Overview”, above for a discussion of the exceptional cash distribution made in
February 2009 and its effects.
Borrowings
Our long-term third party borrowings
are reflected in our balance sheet as “Long-term debt” and as current
liabilities in “Current portion of long-term debt.” As of December 31, 2009,
long term debt remained unchanged from December 31, 2008 at $474.0 million. The
current portion of long term debt for both years was $0 million. Related party
debt is reflected in our balance sheet as “Long-term related-party debt” and as
“Current portion of related-party debt.” As of December 31, 2009, both
long-term related-party debt and current portion of related-party debt were $0
million as compared to $27.8 million and $24.5 million, respectively, for the
year ended December 31, 2008.
Revolving Credit
Facilities
On March 22, 2007, we entered into a
non-amortizing revolving credit facility with a syndicate of financial
institutions, including HSH Nordbank, for up to $370.0 million for the financing
of the acquisition cost, or part thereof, of up to seven medium-range product
tankers. This facility provided us with sufficient funds to purchase the four
newbuildings delivered in 2007, the newbuilding delivered in January 2008 and to
partly fund the purchase price of the remaining two newbuildings we agreed to
purchase from Capital Maritime at the time of our IPO and which were delivered
in June and August of 2008. The existing credit facility was amended on
September 19, 2007, to include the financing of the acquisition cost of the M/T
Attikos and was further supplemented to, amongst others, amend the provisions
relating to security offered under the facility and include references to
additional vessels. As of December 31, 2009, we had drawn down $366.5 million
under our existing credit facility. We drew down $274.5 million during 2007 and
an additional $48.0 million in connection with the acquisition of the M/T
Alexandros II in January 2008 and $44.0 in connection with the
deliveries in June and August of 2008 of the M/T Aristotelis II and the M/T Aris
II, our final two contracted vessels. We did not draw down under this facility
during 2009. We may continue to draw down amounts under this facility until June
2012, at which date any amounts available for borrowing will automatically
terminate and the outstanding amount will automatically convert into a five-year
term loan. In addition, the facility is non-amortizing until June 2012 and we
will not be required to make any repayments of the principal amounts outstanding
under the facility provided that we comply with the covenants and restrictive
ratios set out in the facility and described below. The final maturity date of
this facility is June 2017. Please see Note 5
(Long-Term Debt) to our Financial Statements included herein for more
information.
On March
19, 2008, we entered into an additional 10-year revolving credit facility of up
to $350.0 million, which is non-amortizing until March 2013, with HSH Nordbank
AG, Hamburg. We may use this facility to finance a portion of the acquisition
price of certain identified vessels currently in Capital Maritime’s fleet, which
we may elect to acquire in the future. We may also use this facility to finance
up to 50% of the purchase price of any potential future purchases of modern
tanker vessels from Capital Maritime or any third parties. To date, we have used
$107.5 million of
this facility to fund part of the acquisition price of the M/T Amore Mio II, the
M/T Aristofanis, the M/T Aristotelis II and the M/T Aris II from Capital
Maritime. The facility is non-amortizing until March 2013 and we will not be
required to make any repayments of the principal amounts outstanding under the
facility prior to such date provided that we comply with the covenants and
restrictive ratios set out in the facility and described below. We may continue
to draw amounts under this facility until March 2013, at which date any amounts
available for borrowing will automatically terminate and the outstanding amount
will automatically convert into a five-year term loan. The final maturity date
of this facility is March 2018. The new credit facility is subject to similar
covenants and restrictions as those in our existing facility described
below.
In June 2009, we entered into
amendments to certain terms in both our credit facilities effective for a three
year period from the end of June 2009 to the end of June 2012. The lenders under
both facilities agreed to increase the fleet loan-to-value covenant to 80% from
72.5%. It was also agreed to amend the manner in which market valuations of our
vessels are conducted. In exchange, the interest margin for both of our credit
facilities was increased to 1.35-1.45% over US$ LIBOR subject to the level of
the asset covenants. Previously, the margin on our $370.0 million credit
facility was 0.75% over US$ LIBOR and on our $350.0 million credit facility it
was 1.10% over US$ LIBOR. All other terms in both of our facilities remain
unchanged.
The financing arrangements in place
prior to our IPO or, in case of the non-contracted vessels acquired
subsequently, in place prior to the date of their acquisition, are not
indicative of our current or future financing arrangements. The financing
arrangements in existence at December 31, 2006 represent loans with four
separate banks in which Capital Maritime acted as the borrower and the
respective vessel-owning companies as the guarantors or, in one instance, the
vessel-owning company acted as the borrower and Capital Maritime as the
guarantor, for the financing of the construction of the eight vessels which
comprised our fleet at the time of our IPO. These loans were repaid in their
entirety by Capital Maritime with a portion of the proceeds from our IPO and the
vessels were transferred to us debt free.
As at December 31, 2009, we had $246.0
million in undrawn amounts under our credit facilities.
Our
obligations under both our credit facilities are secured by first-priority
mortgages covering each of our financed vessels and are guaranteed by each
vessel-owning subsidiary. Both our credit facilities contain a “Market
Disruption Clause” requiring us to compensate the banks for any increases to
their funding costs caused by disruptions to the market which the banks may
unilaterally trigger. The interest rate for the three month period ending March
31, 2010, has increased by 0.30503% under our existing credit facility and by
0.20786%, under new credit facility, respectively, in accordance with the terms
of each facility.
Our credit facilities also contain
restrictive covenants that, subject to the approval of our lenders, prohibit us
from, among other things: incurring or guaranteeing indebtedness; charging,
pledging or encumbering the vessels; changing the flag, class, management or
ownership of our vessels; changing the commercial and technical management of
our vessels; selling or changing the beneficial ownership or control of our
vessels; and subordinating the obligations under our existing credit facility to
any general and administrative costs relating to the vessels, including the
fixed daily fee payable under the management agreement.
Under the terms of our credit
facilities we may not be able to pay distributions to our unitholders if we are
not in compliance with certain financial covenants and ratios described below or
upon the occurrence of an event of default or if the fair market value of our
financed vessels is less than 125% of the aggregate amount outstanding under
each credit facility.
In
addition to the above, our credit facilities require us to maintain minimum free
consolidated liquidity (50% of which may be in the form of undrawn commitments
under the credit facility) of at least $500,000 per financed vessel, maintain a
ratio of EBITDA to net interest expense of at least 2.00 to 1.00 on a trailing
four-quarter basis and maintain a ratio of total indebtedness to the aggregate
market value of our total fleet of no more than 0.8 to 1.00 (which means that
the fair market value of the vessels in our fleet must equal 125% of the
aggregate amount outstanding under each credit facility).
As of December 31, 2009 we were in
compliance with financial debt covenants. Our ability to comply with the
covenants and restrictions contained in our credit facilities and any other debt
instruments we may enter into in the future may be affected by events beyond our
control, including prevailing economic, financial and industry conditions,
including interest rate developments, changes in the funding costs of our banks
and changes in asset valuations. If market or other economic conditions
deteriorate, our ability to comply with these covenants may be impaired. If we
are in breach of any of the restrictions, covenants, ratios or tests in our
credit facilities, especially if we trigger a cross-default currently contained
in our credit facilities, a significant portion of our obligations may become
immediately due and payable, and our lenders’ commitment to make further loans
to us may terminate. We may not have, or be able to obtain, sufficient funds to
make these accelerated payments. In addition, obligations under our credit
facilities are secured by our vessels, and if we are unable to repay debt under
the credit facilities, the lenders could seek to foreclose on those
assets.
Furthermore, any contemplated vessel
acquisitions will have to be at levels that do not impair the required ratios
set out above. The current severe economic slowdown has had an adverse effect on
tanker asset values which is likely to persist if the economic slowdown
continues. If the estimated asset values of the vessels in our fleet
continue to decrease, such decreases may limit the amounts we can drawdown under
our credit facilities to purchase additional vessels and our ability to expand
our fleet. In addition, we may be obligated to pre-pay part of our outstanding
debt in order to remain in compliance with the relevant covenants in our credit
facilities. A decline in the market value of our vessels could also lead to a
default under any prospective credit facility to which we become a party, affect
our ability to refinance our existing credit facilities and/or limit our ability
to obtain additional financing.
In connection with our revolving credit
facilities and in order to hedge our exposure to interest rate changes, we have
entered into the following interest rate swap agreements to fix the LIBOR
portion of our interest rate.
|
Currency
|
Notional
Amount
(millions)
|
Fixed
rate
|
Trade
date
|
Value
date
|
Maturity
date
|
|
|
$370.0
million credit facility
|
USD
|
30,000
|
5.1325%
|
02.20.2007
|
04.04.2007
|
06.29.2012
|
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
05.08.2007
|
06.29.2012
|
|
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
07.13.2007
|
06.29.2012
|
|
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
09.28.2007
|
06.29.2012
|
|
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
09.20.2007
|
06.29.2012
|
|
|
USD
|
24,000
|
5.1325%
|
02.20.2007
|
01.29.2008
|
06.29.2012
|
|
|
USD
|
24,000
|
5.1325%
|
02.20.2007
|
01.29.2008
|
06.29.2012
|
|
|
USD
|
24,000
|
5.1325%
|
02.20.2007
|
08.20.2008
|
06.29.2012
|
|
|
USD
|
20,500
|
4.9250%
|
09.20.2007
|
09.24.2007
|
06.29.2012
|
|
|
USD
|
20,000
|
4.520%
|
06.13.2008
|
06.17.2008
|
06.28.2012
|
|
|
$350.0
million credit facility
|
USD
|
46,000
|
3.525%
|
03.25.2008
|
03.27.2008
|
03.27.2013
|
|
USD
|
11,500
|
3.895%
|
04.24.2008
|
04.30.2008
|
03.28.2013
|
|
|
USD
|
28,000
|
4.610%
|
06.13.2008
|
06.17.2008
|
03.28.2013
|
|
|
USD
|
22,000
|
4.099%
|
08.14.2008
|
08.20.2008
|
03.28.2013
|
E.
Off-Balance Sheet Arrangements
As of the date of this Annual Report,
we have not entered into any off-balance sheet arrangements.
F.
Contractual Obligations and Contingencies
The following table summarizes our
long-term contractual obligations as of December 31, 2009 (in thousands of
U.S. Dollars).
|
Payment due by period
|
||||||||||||||||||||
|
Total
|
Less than 1 year
|
1-3
years
|
3-5
years
|
More than
5 years
|
||||||||||||||||
|
Long-term
Debt Obligations
|
$ | 474,000 | $ | - | $ | 18,325 | $ | 92,113 | $ | 363,562 | ||||||||||
|
Interest
Obligations (1) (2)
|
183,729 | 30,530 | 58,831 | 47,721 | 46,647 | |||||||||||||||
|
Management
fee (3)
|
76,439 | 26,463 | 43,234 | 6,742 | - | |||||||||||||||
|
Total
|
$ | 734,168 | $ | 56,993 | $ | 120,390 | $ | 146,576 | $ | 410,209 | ||||||||||
___________
|
(1)
|
Please
refer to the table under “Item 5B: Operating and Financial Review
and Prospects —Liquidity and Capital Resources” above for a
detailed description of the basis for the interest expense calculation
under our credit facilities. The interest rate fixation resulted from the
fourteen interest rate swap agreements that we entered into in order to
reduce our exposure to cash flow risks from fluctuating interest rates and
fully cover our debt.
|
|
(2)
|
The
interest rate for the three month period ended March 31, 2010 has
increased by 0.30503% under our existing credit facility and by 0.20786%,
under our new credit facility in accordance with the terms of each
facility, and reflect the increase in funding costs announced by our banks
for this three month period. In addition, they reflect higher margins in
accordance with the new terms of each facility, as amended since June
2009.
|
|
(3)
|
The
fees payable to Capital Ship Management Corp., represent fees for the
provision of commercial and technical services such as crewing, repairs
and maintenance, insurance, stores, spares and lubricants, provided
pursuant to the management
agreement.
|
Critical
Accounting Policies
The discussion and analysis of our
financial condition and results of operations is based upon our Financial
Statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities at the
date of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are those
that reflect significant judgments or uncertainties, and potentially result in
materially different results under different assumptions and conditions. We have
described below what we believe are our most critical accounting policies that
involve a higher degree of judgment and the methods of their application. For a
description of all of our significant accounting policies, see Note 2
(Significant Accounting Policies) to our Financial Statements included herein for more
information. Please also refer to Note 2 (Significant Accounting Policies –
Recent Accounting Pronouncements) for a description of the most recent
pronouncements issued by the Financial Accounting Standards Board which apply to
us.
Vessel
Lives and Impairment
The
carrying value of each of our vessels represents its original cost (contract
price plus initial expenditures) at the time of delivery or purchase less
accumulated depreciation or impairment charges. Depreciation is calculated based
on the vessel’s capitalized costs using the straight line method over an
estimated useful life of 25 years from the date the vessel was originally
delivered from the shipyard, after considering the estimated residual value.
Residual value calculation is based upon a vessel’s lightweight tonnage
multiplied by a scrap rate of $180 per light weight ton which represents
management’s best estimate based on the historical trends and current industry
conditions. In the shipping industry, the use of a 25-year vessel life for
tankers has become the prevailing standard. However, the actual life of a vessel
may be different, with a shorter life potentially resulting in an impairment
loss. Vessels transferred from Capital Maritime to us are transferred at their
net book values because such transfers are accounted for as transfers of assets
between entities under common control. We
are not aware of any regulatory changes or environmental liabilities that we
anticipate will have a material impact on the vessel lives of our current fleet.
The carrying values of our vessels may not represent their fair market value at
any point in time since the market prices of second-hand vessels tend to
fluctuate with changes in charter rates and the cost of newbuildings. However,
during the year ended December 31, 2009, market conditions changed significantly
as a result of the credit crisis and resulting slowdown in world trade. Charter
rates for tanker vessels decreased and values of assets were affected although
there were limited transactions to confirm the extent of such
decreases. We considered these market developments as indicators of potential
impairment of the carrying amount of our assets.
We performed the undiscounted cash
flow test as of December 31, 2009, determining undiscounted projected net
operating cash flows for the vessels and comparing it to the vessels’ carrying
value. In developing estimates of future cash flows, we made assumptions
about future charter rates, utilization rates, ship operating expenses, future
dry docking costs and the estimated remaining useful life of the vessels.
These assumptions are based on historical trends as well as future expectations
that are in line with our historical performance and our expectations for the
vessels’ utilization under our deployment strategy. Based on these
assumptions we determined that the undiscounted cash flows support the vessels’
carrying amounts as of December 31, 2009.
Revenue
Recognition
We generate revenues from charterers
for the charterhire of our vessels, which are chartered either under time or
bareboat charters. All of our time charters and bareboat charters are classified
as operating leases. Revenues under operating lease arrangements are recognized
when a charter agreement exists, the charter rate is fixed and determinable, the
vessel is made available to the lessee, and collection of the related revenue is
reasonably assured. Revenues are recognized ratably on a straight line basis as
the average revenue over the period of the respective time or bareboat charter
agreement in accordance with accounting for leases. One of our vessels currently
trades on the spot market and, under certain circumstances, we may operate
additional vessels in the spot market until the vessels have been fixed under
appropriate medium to long-term charters. Revenues under voyage charter
agreements are recognized when a voyage agreement exists, the price is fixed,
service is provided and the collection of the related revenue is reasonably
assured, revenues are recorded over the term of the charter as service is
provided and recognized on a pro-rata basis over the duration of the voyage. A
voyage is deemed to commence upon the later of the completion of discharge of
the vessel’s previous cargo or upon vessel arrival to the agreed upon port based
on the terms of a voyage contract that is not cancelable and voyage is deemed to
end upon the completion of discharge of the delivered cargo. Although our charter
revenues are fixed, and, accordingly, little judgment is required to be applied
to the amount of revenue recognition, there is no certainty as to the daily
charter rates or other terms that will be available upon the expiration of our
existing charters.
Revenues
from profit sharing arrangements in time charters represent the portion of time
charter equivalent (voyage income less direct expenses divided by operating
days), that exceeds the agreed base rate and are recognized in the period earned
and when collectability is reasonably ensured.
Interest Rate Swap
Agreements
We designate our derivatives based upon
the criteria established by the FASB in its accounting guidance for derivatives
and hedging activities. The accounting guidance for derivatives requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for the changes in the fair value of the derivative
depends on the intended use of the derivative and the resulting
designation. For a derivative that does not qualify as a cash flow hedge,
the change in fair value is recognized at the end of each accounting period on
the income statement. For a derivative that qualifies as a cash flow
hedge, the change in fair value is recognized at the end of each reporting
period in accumulated other comprehensive income/ (loss) (effective portion)
until the hedged item is recognized in income. The ineffective portion of a
derivative’s change in fair value is immediately recognized in the income
statement.
The
Partnership discontinues cash flow hedge accounting if the hedging instrument
expires, is sold, terminated or exercised, the hedge no longer meets the
criteria for hedge accounting or the Partnership revokes the designation. At
that point in time, any cumulative gain or loss on the hedging instrument
recognized in equity is kept in Partners’ capital until the forecasted
transaction occurs. When the forecasted transaction occurs, any cumulative gain
or loss on the hedging instrument is recognized in profit or loss. If a hedged
transaction is no longer expected to occur, the net cumulative gain or loss
recognized in Partners’ capital is transferred to net profit or loss for the
year as financial income or expense.
An
increase in interest rates will have a positive effect, and a decrease in
interest rates will have a negative effect, on the fair value of our interest
rate swap agreements.
As of
December 31, 2009, all our interest rate swaps qualified as a cash flow hedge
and the changes in their fair value were recognized in accumulated other
comprehensive income/(loss). Please see Note 2 (Significant Accounting
Policies – Interest Rate Swap Agreements) and Note 6 (Financial
Instruments) to our Financial Statements
included herein for more detailed information.
Fair
Value of Financial Instruments
On
January 1, 2008, we adopted the provisions of the accounting guidance for
Fair Value Measurements and Disclosures, for financial assets and liabilities
and any other assets and liabilities carried at fair value. This pronouncement
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Our adoption of this guidance did not
have a material effect on our Financial Statements for financial assets and
liabilities and any other assets and liabilities carried at fair value. The
carrying value of trade receivables, accounts payable and current accrued
liabilities approximates fair value. The fair values of long-term variable rate
bank loans approximate the recorded values, due to their variable interest.
Interest rate swaps are also recorded at fair value. Please see Note 2
(Significant Accounting Policies) and Note 6 (Fair Value of Financial
Instruments) to our Financial Statements included herein for more detailed
information.
A.
Directors and Senior Management
Management
of Capital Product Partners L.P.
Pursuant to our partnership agreement,
our general partner has delegated to our board of directors the authority to
oversee and direct our operations, management and policies on an exclusive
basis, and such delegation is binding on any successor general partner of the
partnership. Our general partner, Capital GP L.L.C., a Marshall Islands limited
liability company wholly owned by Capital Maritime, manages our day-to-day
activities consistent with the policies and procedures adopted by our board of
directors.
Our board
of directors consists of three persons who are designated by our general partner
in its sole discretion and four who are elected by the common unitholders.
Directors appointed by our general partner serve as directors for terms
determined by our general partner and directors elected by our common
unitholders are divided into three classes serving staggered three-year terms.
The initial four directors appointed by Capital Maritime were designated as
Class I, Class II and Class III elected directors. The Class I
Director was re-elected during our 2008 annual meeting of unitholders with a new
term scheduled to expire in 2011 and our Class II Director was re-elected during
our 2009 annual meeting of unitholders with a new term scheduled to expire in
2012. Our initial Class III elected directors will serve until our annual
meeting of unitholders in 2010. At each annual meeting of unitholders, directors
will be elected to succeed the class of directors whose terms have expired by a
plurality of the votes of the common unitholders (excluding common units held by
Capital Maritime and its affiliates). Directors elected by our common
unitholders will be nominated by the board of directors or by any limited
partner or group of limited partners that holds at least 10% of the outstanding
common units.
On January 30, 2009, we announced the
payment of an exceptional non-recurring distribution of $1.05 per unit for the
fourth quarter of 2008, bringing annual distributions to unitholders to $2.27
per unit for the year ended December 31, 2008, a level which under the terms of
our partnership agreement resulted in the early termination of the subordination
period and the automatic conversion of the subordinated units into common units.
Our board of directors unanimously determined that taking into account the
totality of relationships between the parties involved, the payment of this
exceptional distribution was in our best interests taking into consideration the
general economic conditions, lack of any accretive acquisition targets at the
time, our business requirements, risks relating to our business as well as
alternative uses available for our cash. Following such conversion,
Capital Maritime owns a 46.6% interest in us, including 11,304,651common units
and a 2% interest in us through its ownership of our general partner. Prior to
such conversion, certain actions, including the approval of any amendments to
the terms of the partnership agreement, required the approval of a majority of
each of the common and subordinated units, voting separately, or in certain
cases a higher percentage of common units. Following termination of the
subordination period a majority of common units (or in certain cases a higher
percentage), of which Capital Maritime owns 45.6%, will be required in order to
amend the terms of the partnership agreement or to reach certain decisions or
actions, including, amongst others removal of any appointed director for cause,
alter the we distribute out cash and determine reserves, elimination of any
obligation to hold an annual general meeting and changes to the quorum
requirements.
Our general partner intends to cause
its officers to devote as much time to the management of our business and
affairs as is necessary for the proper conduct of our business and affairs. Our
general partner’s Chief Executive Officer and Chief Financial Officer, Ioannis
E. Lazaridis, allocates his time between managing our business and affairs and
the business and affairs of Capital Maritime. The amount of time
Mr. Lazaridis allocates between our business and the businesses of Capital
Maritime varies from time to time depending on various circumstances and needs
of the businesses, such as the relative levels of strategic activities of the
businesses.
Our general partner owes a fiduciary
duty to our unitholders and is liable, as general partner, for all of our debts
(to the extent not paid from our assets), except for indebtedness or other
obligations that are expressly non-recourse to it. Whenever possible, the
partnership agreement directs that we should incur indebtedness or other
obligations that are non-recourse to our general partner. Officers of our
general partner and other individuals providing services to us or our
subsidiaries may face a conflict regarding the allocation of their time between
our business and the other business interests of Capital Maritime. Our
partnership agreement limits our general partner’s and our directors’ fiduciary
duties to our unitholders and restricts the remedies available to unitholders
for actions taken by our general partner or our directors. Please
read “Risk Factors—Our partnership agreement limits the fiduciary duties of our
general partner and our directors to our unitholders and restricts the remedies
available to unitholders for actions taken by our general partner or our
directors” for a more detailed description of such limitations.
Directors
and Senior Management
Set forth below are the names, ages and
positions of our directors and director nominees and our general partner’s
executive officers as of December 31, 2009.
|
Name
|
Age
|
Position
|
||
|
Evangelos
M. Marinakis (1)
|
42 |
Director
and Chairman of the Board
|
||
|
Ioannis
E. Lazaridis (1)
|
42 |
Director
and Chief Executive Officer and Chief Financial Officer of our general
partner
|
||
|
Nikolaos
Syntychakis (1)
|
48 |
Director
|
||
|
Robert
Curt (2)
|
59 |
Director
(5)
|
||
|
Abel
Rasterhoff (3)
|
69 |
Director
(5)
|
||
|
Evangelos
G. Bairactaris (4)
|
38 |
Director
and Secretary
|
||
|
Keith
Forman (4)
|
51 |
Director
(5)
|
(1) Appointed
by our general partner (term expires in 2010).
|
(2)
|
Class
I director (term expires in 2011).
|
|
(3)
|
Class
II director (term expires in 2012).
|
|
(4)
|
Appointed
as initial Class III director (term expires in
2010).
|
|
(5)
|
Member
of our audit committee and our conflicts
committee.
|
Biographical information with respect
to each of our directors, our director nominees and our general partner’s
executive officers is set forth below. The business address for our directors
and executive officers is 3 Iassonos Street Piraeus, 18537 Greece.
Evangelos
M. Marinakis, Director and Chairman of the Board.
Mr. Marinakis joined our board of
directors on March 13, 2007 and serves as the Chairman of the Board.
Mr. Marinakis has served as Capital Maritime’s President and Chief
Executive Officer and as a director since its incorporation in March 2005.
From 1992 to 2005, Mr. Marinakis was the Commercial Manager of Capital Ship
Management and oversaw the businesses of the group of companies that currently
form Capital Maritime. For the past 15 years, Mr. Marinakis has also
been active in various other family businesses, all related to the shipping
industry. During this time he founded Curzon Maritime Limited, a shipping
broker, and Express Sea Transport Corporation, an international vessel operator.
Mr. Marinakis began his career as a Sale & Purchase trainee broker
at Harley Mullion in the UK, and then worked as a chartering broker for Elders
Chartering Limited, also in the UK. Mr. Marinakis holds a B.A. in
International Business Administration and an MSC in International Relations from
the United States International University Europe, London.
Ioannis
E. Lazaridis, Chief Executive and Chief Financial Officer and
Director.
Mr. Lazaridis has served as the
Chief Executive and Chief Financial Officer of our general partner since its
formation in January 2007 and joined our board of directors on March 13,
2007. Mr. Lazaridis has served as Capital Maritime’s Chief Financial
Officer and as a director since its incorporation in March 2005. From 2004
to March 2005, Mr. Lazaridis was employed by our predecessor
companies. From 1996 to 2004, Mr. Lazaridis was employed by Credit Agricole
Indosuez Cheuvreux in London, where he worked in the equity department. From
1993 to 1996, Mr. Lazaridis was employed by Kleinwort Benson in equity
sales and from 1990 to 1993 was employed by Norwich Union Investment Management.
Mr. Lazaridis holds a B.A. degree in economics from the University of
Thessaloniki in Greece and an M.A. in Finance from the University of Reading in
the UK. He is also an Associate for the Institute of Investment Management and
Research in the UK.
Evangelos
G. Bairactaris, Director and Secretary.
Mr. Bairactaris joined our board
of directors on March 13, 2007 and has served as our Secretary since our
formation in January 2007. Mr. Bairactaris is a Greek attorney at law and a
member of the Piraeus Bar Association. Mr. Bairactaris has been a partner
in G.E.Bairactaris & Partners since 2000 and has acted as managing
partner since 2003. He has regularly provided his professional services to our
predecessor companies and many Greek and international shipping companies and
banks. Mr. Bairactaris is currently a director of Hellenic Seaways Maritime
S.A. and Anek Lines (listed on the Athens Stock Exchange), both Greek companies
and two of the largest coastal passenger and cargo transportation services
company operating in Greece and Italy. The law firm of G.E.Bairactaris &
Partners has provided, and may continue to provide, legal services to us and to
Capital Maritime and its affiliates.
Nikolaos
Syntychakis, Director.
Mr. Syntychakis joined our board
of directors on April 3, 2007. Mr. Syntychakis, Managing Director of
Capital Ship Management, joined Capital Ship Management in January 2001
where he has served as Vetting Manager, Crew Manager and Operations Manager.
From 2000 to 2001, Mr. Syntychakis served as Fleet Operator of Delfi S.A.
in Piraeus, Greece and from 1988 to 1997 he worked as the Chief Officer of
Sougerka Maritime also in Piraeus, Greece. Mr. Syntychakis has been
involved in the shipping industry in various capacities for over 25 years
and has also been closely involved with vetting matters, serving on Intertanko’s
Vetting Committee for several years.
Abel
Rasterhoff, Director.
Mr. Rasterhoff joined our board of
directors on April 3, 2007. He serves on our conflicts committee and has been
designated as the audit committee’s financial expert. Mr. Rasterhoff joined
Shell International Petroleum Maatschappij in 1967, and worked for various
entities of the Shell group of companies until his retirement from Shell in
1997. From 1981 to 1984, Mr. Rasterhoff was Managing Director of Shell
Tankers B.V., Vice Chairman and Chairman-elect of the Dutch Council of Shipping
and a Member of the Dutch Government Advisory Committee on the North Sea. From
1991 to 1997, Mr. Rasterhoff was Director and Vice President Finance and
Planning for Shell International Trading and Shipping Company Limited. During
this period he also served as a Board Member of the Securities and Futures
Authority (SFA) in London. From February 1998 to 2004, Mr. Rasterhoff
has served as a member of the executive board and as Chief Financial Officer of
TUI Nederland, the largest Dutch tour operator. From February 2001 to
September 2001, Mr. Rasterhoff served as a member of the executive
board and as Chief Financial Officer of Connexxion, the government owned public
transport company. Mr. Rasterhoff was also on the Supervisory Board of SGR
and served as an advisor to the trustees of the TUI Nederland Pension Fund.
Mr. Rasterhoff served on the Capital Maritime Board from May 2005
until his resignation in February 2007 as the chairman of the audit
committee. Mr. Rasterhoff is currently a director and audit committee
member of Aegean Marine Petroleum Network Inc., a company listed on the New
York Stock Exchange. Mr. Rasterhoff holds a graduate business degree in
economics from Groningen State University.
Keith
Forman, Director.
Mr. Forman joined our board of
directors on April 3, 2007 and serves on our
conflicts committee and our audit committee. Mr. Forman is a Partner and serves
as Chief Financial Officer of Crestwood Midstream Partners. Crestwood
Midstream is a private investment partnership focused on making equity
investments in the midstream energy market. Crestwood’s other
partners include the Blackstone Group, Kayne Anderson and GSO
Capital. Mr. Forman is also a member of the board of directors of
Energy Solutions International Ltd., a supplier of oil and gas pipeline
software management systems. From January 2004 to July 2005, he was
Senior Vice President, Finance for El Paso Corporation, a leading provider of
natural gas services. Mr. Forman, who joined El Paso in 1998 upon their
acquisition of the general partner of the Leviathan Gas Pipeline Partners, also
served as Vice President from 2001 to 2003, of El Paso Field Services and from
1992 to 2003 he served as Chief Financial Officer of GulfTerra Energy Partners
L.P., a publicly traded master limited partnership. In his position with
GulfTerra, he was responsible for the financing activities of the partnership,
including its commercial and investment banking relationships.
Robert
P. Curt, Director.
Mr. Curt joined our board of directors
on July 24, 2007 and serves on our conflicts committee and our audit committee.
He had been a career executive for more than 30 years with ExxonMobil, and was
named General Manager of ExxonMobil’s Marine Transportation department following
the merger of Exxon and Mobil in 1999. In 2003, he was seconded to Qatargas to
lead its LNG vessel acquisition program and subsequently was appointed Managing
Director of Qatar Gas Transport Company, the world’s largest owner of LNG
vessels. In 2006, he returned to the U.S., where he served as Vice President in
ExxonMobil’s SeaRiver subsidiary. Mr. Curt received his B.S. degree in Marine
Engineering from the U.S. Merchant Marine Academy, Kings Point, and holds an MBA
in Finance from Iona College.
B.
Compensation
Reimbursement
of Expenses of Our General Partner
Our general partner does not receive
any management fee or other compensation for managing us. Our general partner
and its other affiliates are reimbursed for expenses incurred on our behalf.
These expenses include all expenses necessary or appropriate for the conduct of
our business and allocable to us, as determined by our general partner. Our
general partner did not incur any such expenses prior to our IPO in April
2007.
Executive
Compensation
We and our general partner were formed
in January 2007. Neither we nor our general partner have paid any compensation
to our directors or our general partner’s officers nor accrued any obligations
with respect to management incentive or retirement benefits for our directors or
our general partner’s officers prior to April 3, 2007. Because our Chief
Executive Officer and Chief Financial Officer, Mr. Lazaridis, is an employee of
Capital Maritime, his compensation is set and paid by Capital Maritime, and we
reimburse Capital Maritime for the cost of the provided services.
We do not
have a retirement plan for our executive officers or directors. Officers
and employees of our general partner or its affiliates may participate in
employee benefit plans and arrangements sponsored by Capital Maritime, our
general partner or their affiliates, including plans that may be established in
the future.
Compensation
of Directors
Officers
of our general partner or Capital Maritime who also serve as our directors do
not receive additional compensation for their service as directors. Our
directors receive compensation for attending meetings of our board of directors
or committee meetings as well as for serving in the role of committee chair. For
the year ended December 31, 2009, our directors, excluding our chairman,
received an aggregate amount of $350,000 as compared to $290,000 for the year
ended December 31, 2008 and $202,274 received for the period from our IPO in
April 2007 to December 31, 2007. In lieu of any other compensation, our
chairman receives an annual fee of $100,000 for acting as a director and as the
chairman of our board of directors. For the year ended December 31, 2007 this
compensation amounted to $80,205. In addition, each director is reimbursed for
out–of–pocket expenses in connection with attending meetings of the board of
directors or committees and is fully indemnified by us for actions associated
with being a director to the extent permitted under Marshall Islands law. Please
also read Item 6E: “Share Ownership --- Restricted Units” below.
Services
Agreement
Under the three-year services agreement
entered into between our general partner and Mr. Lazaridis at the time of
our IPO, if a change in control occurs within two years from the date of the
agreement, Mr. Lazaridis may resign within six months of such change in
control.
C.
Board Practices
Our general partner, Capital GP L.L.C.,
manages our day-to-day activities consistent with the policies and procedures
adopted by our board of directors which currently consists of seven members,
four of which are independent. Unitholders are not entitled to elect the
directors of our general partner or directly or indirectly participate in our
management or operation. There are no service contracts between us and any of
our directors providing for benefits upon termination of their employment or
service.
Although the Nasdaq Global Market does
not require a listed limited partnership like us to have a majority of
independent directors on our board of directors or to establish a compensation
committee or a nominating/corporate governance committee our board of directors
has established an audit committee and a conflicts committee comprised solely of
independent directors. Each of the committees operates under a written charter
adopted by our board of directors which is available under “Corporate
Governance” in the Investor Relations tab of our web site at
www.capitalpplp.com. The membership and main functions of each committee are
described below
Audit Committee. The audit
committee of our board of directors is composed of three or more independent
directors, each of whom must meet the independence standards of the Nasdaq
Global Market, the SEC and any other applicable laws and regulations governing
independence from time to time. The audit committee is currently comprised of
directors Abel Rasterhoff (chair), Robert P. Curt and Keith Forman. All members
of the committee are financially literate and our board of directors has
determined that Mr. Rasterhoff qualifies as an “audit committee financial
expert” for purposes of the U.S. Sarbanes-Oxley Act. The audit committee, among
other things, reviews our external financial reporting, engages our external
auditors and oversees our internal audit activities and procedures and the
adequacy of our internal accounting controls.
Conflicts Committee. The
conflicts committee of our board of directors is composed of the same directors
constituting the audit committee, being Keith Forman (chair), Abel Rasterhoff
and Robert P. Curt. The members of our conflicts committee may not be officers
or employees of our general partner or directors, officers or employees of its
affiliates, and must meet the independence standards established by The Nasdaq
Global Market to serve on an audit committee of a board of directors and certain
other requirements. The conflicts committee reviews specific matters that the
board believes may involve conflicts of interest and determines if the
resolution of the conflict of interest is fair and reasonable to
us. Any matters approved by the conflicts committee will be
conclusively deemed to be fair and reasonable to us, approved by all of our
partners, and not a breach by our directors, our general partner or its
affiliates of any duties any of them may owe us or our unitholders.
D.
Employees
We currently do not have our own
executive officers and rely on the officers of our general partner to manage our
day-to-day activities consistent with the policies and procedures adopted by our
board of directors. All of the executive officers of our general partner and
three of our directors also are executive officers, directors or affiliates of
Capital Maritime.
E.
Share Ownership
As of December 31, 2009:
|
|
●
|
None
of our directors, executive officers or employees (other than Mr.
Marinakis), including the directors, executive officers or employees of
our general partner, owned, or may be deemed to beneficially
own any of our units;
|
|
|
●
|
No
units had been issued, or awards made under our Omnibus Incentive
Compensation Plan described below;
and
|
|
|
●
|
The
Marinakis family, including our chairman Mr. Marinakis, through its
beneficial ownership of Capital Maritime, may be deemed to beneficially
own, or to have beneficially owned, all of the units held by Capital
Maritime.
|
Restricted
Units
On April 29, 2008 our board of
directors adopted an Omnibus Incentive Compensation Plan (the “Plan”) according
to which we may issue a limited number of restricted units, not to exceed
500,000 restricted units, to some of our employees, consultants, directors or
affiliates, including the employees, consultants or directors of our general
partner, Capital Maritime, Curzon Maritime Limited, Curzon Shipbrokers Corp. and
their affiliates at a future date. To date no restricted units have been issued
to any person or entity under the Plan.
A.
Major Unitholders
Following the early termination of the
subordination period on February 14, 2009, all of our 8,805,522 subordinated
units converted into common units on a one-for-one basis. As of December 31,
2009, our partners’ capital consisted of 24,817,151 common units, no
subordinated units and 506,472 general partner units. Capital Maritime, the sole
member of our general partner, owns a 46.6% interest in us, including 11,304,651
common units and a 2% interest in us through its ownership of our general
partner.
The following table sets forth as of
December 31, 2009, the beneficial ownership of our common units by each person
we know beneficially owns more than 5.0% or more of our common, and all of our
directors, director nominees and the executive officers of our general partner
as a group. The number of units beneficially owned by each person is determined
under SEC rules and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under SEC rules a person beneficially owns any
units as to which the person has or shares voting or investment
power.
|
Number of Common Units Owned
|
Percentage of Total Common
Units
|
|||||||
|
Name of Beneficial Owner
|
||||||||
|
Capital
Maritime (1)(2)
|
11,304,651 | 45.56 | % | |||||
|
All
executive officers and directors as a group (7 persons)
(2)(3)
|
0 | 0 | % | |||||
|
Kayne
Anderson Capital Advisors, L.P. (4)
|
2,745,999 | 11.06 | % | |||||
|
(1)
|
Excludes
the 2% general partner interest held by our general partner, a wholly
owned subsidiary of Capital Maritime. Includes 8,805,522 common units
owned by Capital Maritime following the automatic conversion on a
one-for-one basis of all our subordinated units (8,805,522) on February
14, 2009 as a result of the early termination of the subordination period
under the terms of our partnership agreement. No other parties owned any
of our subordinated units at any
time.
|
|
(2)
|
The
Marinakis family, including our chairman Mr. Marinakis, through its
ownership of Capital Maritime, may be deemed to beneficially own, or to
have beneficially owned, all of the units held by Capital
Maritime.
|
|
(3)
|
With
the exception of our director Keith Forman who as of the date of the IPO
has owned common units representing less than 1.0% of our common units,
none of our directors, director nominees or the officers of our general
partner (other than Mr. Marinakis) may be deemed to beneficially own,
or to have beneficially owned, any of our
units.
|
|
(4)
|
Kayne
Anderson Capital Advisors, L.P., is an investment adviser. This
information is based on the Schedule 13F filed by Kayne Anderson Capital
Advisors, L.P. with the SEC on November 13, 2009. For the year
ended December 31, 2008, based on the Schedule 13G filed by Kayne
Anderson Capital Advisors L.P and Richard A. Kayne on February 11, 2009,
these parties owned 5.78% of our common units prior to the termination of
the subordination in February 2009 (3.73% of our total common units
following the termination of the
subordination).
|
Our majority unitholders have the same
voting rights as our other unitholders except that if at any time, any person or
group, other than our general partner, its affiliates, including Capital
Maritime, their transferees, and persons who acquired such units with the prior
approval of our board of directors, owns beneficially 5% or more of any class of
units then outstanding, any such units owned by that person or group in excess
of 4.9% may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders, calculating
required votes, except for purposes of nominating a person for election to our
board, determining the presence of a quorum or for other similar purposes under
our partnership agreement, unless otherwise required by law. The voting rights
of any such unitholders in excess of 4.9% will be redistributed pro rata among
the other common unitholders holding less than 4.9% of the voting power of all
classes of units entitled to vote. We are not aware of any arrangements, the
operation of which may at a subsequent date result in a change in control of
Capital Product Partners L.P.
B.
Related-Party Transactions
Capital Maritime, the sole member of
our general partner, owns 11,304,651 common units representing 45.6% of our
outstanding common units. In addition, our general partner owns a 2% general
partner interest in us and all of the incentive distribution
rights. Capital Maritime’s ability, as sole member of our general
partner, to control the appointment of three of the seven members of our board
of directors and to approve certain significant actions we may take as well as
its ownership of 45.6% of our common units which it can vote in their totality
on all matters that arise under the partnership agreement, means that Capital
Maritime, together with its affiliates, will have the ability to exercise
significant influence regarding our management and may be able to propose
amendments to the partnership agreement that are in its best
interest.
Transactions
entered into after December 31, 2009
|
1.
|
M/T Agisilaos – Guaranteed
Charter Party Agreement with subsidiary of Capital Maritime. On
January 21, 2010, we rechartered the M/T Agisilaos with a subsidiary of
Capital Maritime at a net daily charter rate of $11,850 ($12,000 gross).
The charter also includes 50/50 profit share for voyages outside the IWL.
The charter commences directly upon the vessel’s redelivery from its
current charter with BP Shipping Limited, expected in March 2010, and has
an earliest scheduled expiration date of February 2011. The performance of
the charter is guaranteed by Capital Maritime. The transaction was
approved by our board of directors following approval by the conflicts
committee of independent directors.
|
|
2.
|
M/T Axios – Guaranteed Charter
Party Agreement with subsidiary of Capital Maritime. On January 21,
2010, we rechartered the M/T Axios with a subsidiary of Capital Maritime
at a net daily charter rate of $12,591 ($12,750 gross). The charter also
includes 50/50 profit share for voyages outside the IWL. The charter
commences directly upon the vessel’s redelivery from its current charter
with BP Shipping Limited, expected in February 2010 and has an earliest
scheduled expiration date of January 2011. The performance of the charter
is guaranteed by Capital Maritime. The transaction was approved by our
board of directors following approval by the conflicts committee of
independent directors.
|
|
3.
|
Investor Relations Services
Agreement. On January 1, 2010, we entered into a one-year Investor
Relations Agreement with Capital Ship Management to clarify the provisions
under which certain investor
relations and corporate support services to assist us in our
communications with unitholders shall be provided to us pursuant to
the provisions of the Administrative Services Agreement entered into with
Capital Ship Management and subject to its terms. Under the terms of the
agreement we pay Capital Ship Management a fixed monthly fee
of $15,000 plus reimbursement of reasonable
expenses.
|
Transactions
entered into during the year ended December 31, 2009
|
1.
|
Share Purchase Agreement –
Exchange of M/T Atrotos with M/T Ayrton II. On April 13, 2009, the
2007 built M/T Atrotos, was exchanged for the M/T Ayrton II, a 51,260 dwt
chemical/product tanker built in April 2009 at STX Shipbuilding Co. Ltd,
South Korea. The M/T Ayrton II has been chartered to BP Shipping Limited
under a time charter with expected expiration in March 2012 (third year
subject to charterer’s option), at a base gross rate of $22,275 per day
(net rate $22,000) plus a 50/50 profit share for breaching IWL. The M/T
Ayrton II was delivered to Capital Maritime in April 2009 and is one of
the vessels identified under our omnibus agreement with Capital Maritime.
The vessel’s operating expenses are fixed at a daily rate of $6,500 per
day for approximately the next five years under the Management Agreement.
Under the terms of the share purchase agreement all assets and liabilities
of the vessel-owning company of the M/T Ayrton II, except the vessel,
necessary permits and time charter agreement, were retained by Capital
Maritime. In exchange, Capital Maritime received all the shares of the
vessel-owning company of the M/T Atrotos, and an additional consideration
of $4.0 million to reflect the value and longer duration of the charter
attached to the vessel, as well as its younger age, and we remained
responsible for any costs associated with the delivery of the vessel to
Capital Maritime. All assets and liabilities of the vessel-owning company
of the M/T Atrotos, except the vessel and necessary permits were retained
by us. Morgan Stanley Capital Group Inc., the charterer of the M/T Atrotos
agreed to compensate us for the early termination of the charter attached
to the vessel. The transaction was approved by our board of directors
following approval by the conflicts committee of independent directors.
Please see “Item 5B: Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Net Cash Used in Investing
Activities” and Note 1 (Basis of Presentation and General Information) to
our Financial Statements included herein for more information regarding
this acquisition and the exchange of shares, including a detailed
explanation of how it was accounted
for.
|
|
2.
|
Related Party Loan – M/T
Ayrton II. For the financing of the construction of the M/T Ayrton
II, Capital Maritime entered into a loan agreement with a bank on
behalf of the related vessel-owning subsidiary. Capital Maritime acted as
the borrower and the vessel-owning subsidiary acted as the guarantor in
this loan agreement. The M/T Ayrton II had been financed in the amount of
$22.9 million as of December 31, 2008. This loan was fully repaid by
Capital Maritime upon the delivery of the vessel to the related
vessel-owning subsidiary from the shipyard in April 2009, before the
vessel was transferred to us.
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3.
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Share Purchase Agreement –
Exchange of M/T Assos with M/T Agamemnon II. On April 7, 2009, the
2007 built M/T Assos was exchanged for the M/T Agamemnon II, a 51,238 dwt
chemical/product tanker built in 2008 at STX Shipbuilding Co. Ltd, South
Korea, which was part of the Capital Maritime fleet at the time, . The M/T
Agamemnon II has been chartered to BP Shipping Limited under a time
charter expected to expire in December 2011, at the earliest, at a base
gross rate of $22,275 per day (net rate $22,000) plus a 50/50 profit share
for breaching IWL (Institute Warranty Limits -- applies to voyages to
certain ports at certain periods of the year). The M/T Agamemnon II was
delivered to Capital Maritime in November 2008 and is one of the vessels
identified under our Omnibus Agreement with Capital Maritime. The vessel’s
operating expenses are fixed at a daily rate of $6,500 per day for
approximately the next five years under the Management Agreement. Under
the terms of the share purchase agreement all assets and liabilities of
the vessel-owning company of the M/T Agamemnon II, except the vessel,
necessary permits and time charter agreement, were retained by Capital
Maritime. In exchange, Capital Maritime received all the shares
of the vessel-owning company of M/T Assos, and additional
consideration of $4.0 million to reflect the value and longer duration of
the charter attached to the vessel, as well as its younger age, and we
remained responsible for any costs associated with the delivery of the
vessel to Capital Maritime. All assets and liabilities of the
vessel-owning company of M/T Assos, except the vessel and necessary
permits were retained by us. Morgan Stanley Capital Group Inc., the
charterer of the M/T Assos agreed to compensate us for the early
termination of the charter attached to the vessel. The transaction was
approved by our board of directors following approval by the conflicts
committee of independent directors. Please see “Item 5B: Operating and
Financial Review and Prospects—Liquidity and Capital Resources—Net Cash
Used in Investing Activities” and Note 1 (Basis of Presentation and
General Information) to our Financial Statements included herein for more
information regarding this acquisition and the exchange of shares,
including a detailed explanation of how it was accounted
for.
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4.
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Related Party Loan – M/T
Agamemnon II. Upon delivery of the M/T Agamemnon II to Capital
Maritime in November 2008, Capital Maritime entered into a loan agreement
with a bank for the financing of the vessel. Capital Maritime acted as the
borrower and the vessel-owning subsidiary acted as the guarantor in this
loan agreement. As of December 31, 2008 the balance outstanding under this
loan was $29.4 million. The vessel-owning subsidiary of the M/T Agamemnon
II ceased to be a guarantor under the loan as of the date the vessel was
transferred to us.
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5.
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Agreement with Capital GP
L.L.C. re Incentive Distribution Rights (“IDRs”). On January 30,
2009, we entered into an agreement with our general partner, Capital GP
L.L.C., whereby the general partner agreed to defer receipt of a portion
of the $12.7 million incentive distribution payment it is entitled to
under the terms of our partnership agreement as a result of the payment of
an exceptional cash distribution in February 2009. The general partner
received the $12.7 million of incentive payments in four equal quarterly
installments, with the first installment having been paid on February 13,
2009. These payments were made from the operating surplus. As of December
31, 2009, the $12.7 million incentive distribution payment had paid in
full to Capital GP L.L.C.
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6.
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Investor Relations Services
Agreement. On January 1, 2009, we entered into a one-year Investor
Relations Agreement with Capital Ship Management to clarify the provisions
under which certain investor
relations and corporate support services to assist us in our
communications with unitholders shall be provided to us further to
the provisions of the Administrative Services Agreement entered into with
Capital Ship Management and subject to its terms. Under the terms of the
agreement we pay Capital Ship Management a fixed monthly fee
of $15,000 plus reimbursement of reasonable
expenses.
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Transactions entered into during the year ended December 31, 2008
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1.
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Related Party Loan – M/T
Agamemnon II. For the financing of the construction of the M/T
Agamemnon II, Capital Maritime had entered into a loan agreement with a
bank on behalf of the related vessel-owning subsidiary. Capital Maritime
acted as the borrower and the vessel-owning subsidiary acted as guarantor
in this loan agreement. The M/T Agamemnon II had been financed in the
amount of $12.2 million during 2008. This loan was fully repaid by Capital
Maritime upon the delivery of the vessel to the related vessel-owning
subsidiary from the shipyard in November
2008.
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2.
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Services Agreements with
Capital Maritime. On July 31, 2008, we entered into two separate
agreements with Capital Maritime under which Capital Maritime agreed to
arrange for the provision of certain legal, accounting and administrative
support services required by us a) in connection with the preparation and
filing of our Registration Statement on Form F-3 in August 2008, and b) in
connection with our compliance with the provisions of the Sarbanes Oxley
Act, and in particular, Section 404. We agreed to reimburse Capital
Maritime for its reasonable expenses within 30 days from submission of
invoices.
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3.
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Related Party Loan – M/T Amore
Mio II. For the financing of the acquisition of the M/T Amore Mio
II, Capital Maritime had entered into a loan agreement with a bank on
behalf of the related vessel-owning subsidiary. Capital Maritime acted as
the borrower and the vessel-owning subsidiary acted as the guarantor in
this loan agreement. The outstanding balance of $52.5 million on this loan
was fully repaid by Capital Maritime in March 2008, before the vessel was
transferred to us.
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4.
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Capital Contribution by
Capital Maritime. On April 30, 2008, Capital Maritime, which owns
and controls our general partner, Capital GP L.L.C., made a capital
contribution of 10,026 common units to our general partner, which our
general partner in turn contributed to us in exchange for the issuance of
10,026 general partner units to our general partner in order for it to
maintain its 2% general partner interest in us. Following the issuance of
common units in connection with the purchase of the M/T Aristofanis,
Capital Maritime owned a 46.6% interest in us, including its 2% interest
through its ownership of our general
partner.
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5.
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Purchase of M/T
Aristofanis. On April 30, 2008, we entered into a share purchase
agreement with Capital Maritime pursuant to which we acquired all of
Capital Maritime’s interests in the wholly owned subsidiary that owns the
M/T Aristofanis. The aggregate purchase price for the vessel was $23.0
million under the terms of the share purchase agreement with Capital
Maritime. We funded a portion of the purchase price of the vessel through
the issuance of 501,308 common units to Capital Maritime at a price of
$20.08 per unit, which was the price per unit as quoted on the Nasdaq
Stock Exchange on the day prior to the acquisition, and the remainder
through the incurrence of $11.5 million of debt under our new credit
facility. The M/T Aristofanis, a 12,000 dwt, 2005 built, double hull
product tanker sister vessel to the M/T Attikos, is chartered
to Shell International Trading & Shipping Company Ltd under
a charter with an earliest scheduled expiration date of March 2010 at a
base gross rate of $13,250 per day (net rate $12,952). The transaction was
approved by our board of directors following approval by the conflicts
committee of independent directors. Please see “Item 5B: Operating and
Financial Review and Prospects—Liquidity and Capital Resources—Net Cash
Used in Investing Activities” and Note 1 (Basis of Presentation and
General Information) to our Financial Statements included herein for more
information regarding this acquisition, including a detailed explanation
of how it was accounted for.
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6.
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Capital Contribution by
Capital Maritime. On March 31, 2008, Capital Maritime, which owns
and controls our general partner, Capital GP L.L.C., made a capital
contribution of 40,976 common units to our general partner, which our
general partner in turn contributed to us in exchange for the issuance of
40,976 general partner units to our general partner in order for it to
maintain its 2% general partner interest in us. Following the issuance of
common units in connection with the purchase of the M/T Amore Mio II and
the capital contribution described above, Capital Maritime owned a 45.6%
interest in us, including its 2% interest through its ownership of our
general partner.
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7.
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Purchase of M/T Amore Mio
II. On March 27, 2008 we entered into a
share purchase agreement with Capital Maritime pursuant to which we
acquired all of Capital Maritime’s interests in the wholly owned
subsidiary that owns the M/T Amore Mio II. The aggregate purchase price
for the vessel was $95.0 million under the terms of the relevant share
purchase agreement with Capital Maritime. We funded a portion of the
purchase price of the vessel through the
issuance of 2,048,823 common units to Capital Maritime at a price
of $18.42 per unit, which was the price per unit as quoted on the Nasdaq
Stock Exchange on the day prior to the acquisition, and the remainder through the incurrence of $46.0
million of debt under our new credit facility and $2.0 million in
cash. The M/T Amore Mio II, a 159,982 dwt, 2001 built,
double-hull tanker, is chartered to BP Shipping Limited under a charter
with an earliest scheduled expiration date of January 2011 at a base gross rate of $36,456 per day (net rate
$36,000). The charter is also subject to a profit sharing
arrangement which is calculated and settled monthly and which allows each
party to share additional revenues above the base rate on a 50/50 basis.
The transaction was approved by our board of directors following approval
by the conflicts committee of independent directors. Please see “Item 5B:
Operating and Financial Review and Prospects—Liquidity and Capital
Resources—Net Cash Used in Investing Activities” and Note 1 (Basis of
Presentation and General Information) to our Financial Statements included
herein for more information regarding this acquisition, including a
detailed explanation of how it was accounted
for.
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Transactions
entered into during the year ended December 31, 2007
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1.
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Purchase of M/T
Attikos. On September 24, 2007 we entered into a share purchase
agreement with Capital Maritime pursuant to which we acquired all of
Capital Maritime’s interests in the wholly owned subsidiary that owns the
M/T Attikos. The aggregate purchase price for the vessel was $23.0
million. The acquisition was funded by borrowing $20.5 million under our
existing revolving credit facility and the remaining $2.5 million was
contributed from available cash. The M/T Attikos, a 12,000 dwt, 2005 built
double-hull product tanker, was chartered to Trafigura Beheer B.V. at the
time of its delivery, under a charter with an earliest scheduled
expiration date of September 2009 at a gross rate of $13,850 per day (net
rate $13,503). The transaction was approved by our board of directors
following approval by the conflicts committee of independent directors.
This vessel was redelivered to us in October 2009 at the expiration of its
charter and is now trading in the spot
market.
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2.
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Dividend to Capital
Maritime. At the closing of our IPO, we borrowed $30.0 million
under our existing credit facility, $5 million of which
we used for working capital purposes and $25.0 million of
which we used to pay a cash dividend to Capital Maritime. We
also issued to Capital Maritime a number of common units necessary to
satisfy the underwriters’ overallotment option. We accounted for the
distribution to Capital Maritime of the common units necessary to satisfy
the underwriters’ overallotment option as a common unit dividend, which
had no net impact on partners’
equity.
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3.
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Contribution Agreement.
Pursuant to a Contribution Agreement, entered into concurrently
with the closing of our IPO, Capital Maritime sold us all of the
outstanding capital stock of eight vessel-owning subsidiaries that owned
the vessels in our initial fleet (Capital Maritime retained all assets of
those subsidiaries other than the vessels, and paid off all debt of those
subsidiaries), in exchange for:
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a.
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the
issuance to Capital Maritime of 11,750,000 common units and 8,805,522
subordinated units,
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b.
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the
payment to Capital Maritime of a cash dividend in the amount of $25.0
million at the closing of our IPO,
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c.
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the
issuance to Capital Maritime of the right to receive an additional
dividend of $30.0 million in cash or a number of common units
necessary to satisfy the underwriters’ overallotment option or a
combination thereof, and
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d.
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the
issuance of the 2% general partner interest in us and all of our incentive
distribution rights to Capital GP L.L.C, a wholly owned subsidiary of
Capital Maritime.
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4.
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Omnibus Agreement. In
connection with our IPO, we entered into an omnibus agreement with Capital
Maritime, Capital GP L.L.C., our general partner, and our operating
subsidiary. The following discussion describes provisions of the omnibus
agreement.
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Noncompetition. Under the
omnibus agreement, Capital Maritime has agreed, and has caused its controlled
affiliates (other than us, our general partner and our subsidiaries) to agree,
not to acquire, own or operate medium range tankers under charter for two or
more years. This restriction will not prevent Capital Maritime or any of its
controlled affiliates (other than us and our subsidiaries) from:
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a.
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acquiring,
owning, chartering or operating medium range tankers under charter for
less than two years;
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b.
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acquiring
one or more medium range tankers under charter for two or more years if
Capital Maritime offers to sell to us the tanker for the acquisition price
plus any administrative costs associated with transfer and re-flagging,
including related legal costs, to Capital Maritime that would be required
to transfer the medium range tankers and related charters to us at the
time it is acquired or putting a medium range tanker that Capital Maritime
owns or operates under charter for two or more years if Capital Maritime
offers to sell the tanker to us for fair market value at the time it is
chartered for two or more years and, in each case, at each renewal or
extension of that charter for two or more
years;
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c.
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acquiring
one or more medium range tankers under charter for two or more years as
part of the acquisition of a controlling interest in a business or package
of assets and owning and operating or chartering those vessels provided,
however, that:
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i.
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if
less than a majority of the value of the total assets or business acquired
is attributable to those medium range tankers and related charters, as
determined in good faith by the board of directors of Capital Maritime;
Capital Maritime must offer to sell such medium range tankers and related
charters to us for their fair market value plus any additional tax or
other similar costs to Capital Maritime that would be required to transfer
the medium range tankers and related charters to us separately from the
acquired business.
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ii.
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if
a majority or more of the value of the total assets or business acquired
is attributable to the medium range tankers and related charters, as
determined in good faith by the board of directors of Capital Maritime.
Capital Maritime shall notify us in writing, of the proposed acquisition.
We shall, not later than the 10th calendar day following receipt of such
notice, notify Capital Maritime if we wish to acquire the medium range
tankers and related charters forming part of the business or package of
assets in cooperation and simultaneously with Capital Maritime acquiring
the Non-Medium Range Tankers (as defined below) and related charters
forming part of that business or package of assets. If we do not notify
Capital Maritime of our intent to pursue the acquisition within 10
calendar days, Capital Maritime may proceed with the acquisition as
provided in (i) above.
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d.
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acquiring
a non-controlling interest in any company, business or pool of
assets;
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e.
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acquiring,
owning or operating medium range tankers under charter for two or more
years subject to the offers to us described in paragraphs (b) and
(c) above (i) pending our determination whether to accept such
offers and pending the closing of any offers we accept, or (ii) if we
elect to acquire the medium range tankers and related
charter;
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f.
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providing
ship management services relating to any vessel whatsoever, including to
medium range tankers owned by the controlled affiliates of Capital
Maritime; or
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g.
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acquiring,
operating or chartering medium range tankers under charter for two or more
years if we have previously advised Capital Maritime that we consent to
such acquisition, operation or
charter.
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If
Capital Maritime or any of its controlled affiliates (other than us or our
subsidiaries) acquires, owns, operates and charters medium range tankers
pursuant to any of the exceptions described above, it may not subsequently
expand that portion of its business other than pursuant to those
exceptions.
In
addition, under the omnibus agreement we agreed, and caused our
subsidiaries to agree, to only acquire, own, operate or charter medium range
tankers with charters of two or more years (any vessels that are not medium
range tankers will in the following be referred to as the “Non-Medium Range
Tankers”). This restriction does not:
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a.
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apply
to any Non-Medium Range Tanker owned, operated or chartered by us or any
of our subsidiaries, and the ownership, operation or chartering of any
Non-Medium Range Tanker that replaces any of those Non-Medium Range
Tankers in connection with the destruction or total loss of the original
tanker; the tanker being damaged to an extent that makes repairing it
uneconomical or renders it permanently unfit for normal use, as determined
in good faith by our board of directors within 90 days after the
occurrence of the damage; or the tanker’s condemnation, confiscation,
requisition, seizure, forfeiture or a similar taking of title to or use of
it that continues for at least six
months;
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b.
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prevent
us or any of our subsidiaries from acquiring Non-Medium Range Tankers and
any related charters as part of the acquisition of a controlling interest
in a business or package of assets and owning and operating or chartering
those vessels, provided, however,
that:
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i.
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if
less than a majority of the value of the total assets or business acquired
is attributable to Non-Medium Range Tankers and related charters, as
determined in good faith by our board of directors we must offer to sell
such Non-Medium Range Tankers and related charters to Capital Maritime
within 30 days for their fair market value plus any additional tax or
other similar costs to us that would be required to transfer the
Non-Medium Range Tankers and related charters to Capital Maritime
separately from the acquired
business;
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ii.
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if
a majority or more of the value of the total assets or business acquired
is attributable to Non-Medium Range Tankers and related charters, as
determined in good faith by our board of directors we shall notify Capital
Maritime in writing of the proposed acquisition. Capital Maritime shall,
not later than the 10th calendar day following receipt of such notice,
notify us if it wishes to acquire the Non-Medium Range Tankers forming
part of the business or package of assets in cooperation and
simultaneously with the us acquiring the medium range tankers under
charter for two or more years forming part of that business or package of
assets. If Capital Maritime does not notify us of its intent to pursue the
acquisition within 10 calendar days, we may proceed with the acquisition
as provided in (i) above.
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c.
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prevent
us from acquiring a non-controlling interest in any company, business or
pool of assets;
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d.
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prevent
us or any of our subsidiaries from owning, operating or chartering any
Non-Medium Range Tankers subject to the offer to Capital Maritime
described in paragraph (b) above, pending its determination whether
to accept such offer and pending the closing of any offer it accepts;
or
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e.
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prevent
us or any of our subsidiaries from acquiring, operating or chartering
Non-Medium Range Tankers if Capital Maritime has previously advised us
that it consents to such acquisition, operation or
charter.
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If we or
any of our subsidiaries owns, operates and charters Non-Medium Range Tankers
pursuant to any of the exceptions described above, neither we nor such
subsidiary may subsequently expand that portion of our business other than
pursuant to those exceptions.
Rights of First Offer on Medium
Range Tankers. Under the omnibus
agreement, we and our subsidiaries granted to Capital Maritime a first offer on
any proposed sale, transfer or other disposition of any of our medium range
tankers and related charters or any Non-Medium Range Tankers and related
charters owned or acquired by us. Likewise, Capital Maritime agreed (and caused
its subsidiaries to agree) to grant a similar right of first offer to us for any
medium range tankers under charter for two or more years it might own. These
rights of first offer do not apply to a sale, transfer or other disposition of
vessels between any affiliated subsidiaries, or pursuant to the terms of any
charter or other agreement with a charter party.
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5.
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Management Agreement.
We entered into a Management Agreement with Capital Ship Management, a
subsidiary of Capital Maritime, pursuant to which Capital Ship Management
provides us with certain commercial and technical management services.
These services will be provided in a commercially reasonable manner in
accordance with customary ship management practice and under our
direction. Capital Ship Management may provide these services to us
directly or it may subcontract for certain of these services with other
entities, including other Capital Maritime subsidiaries.
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a.
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We
pay Capital Ship Management a fixed daily fee per time chartered vessel in
our fleet to provide the commercial and technical management services and
costs to such time chartered vessels, which includes the cost of the first
special survey. We pay a fixed daily fee of $250 per bareboat chartered
vessel in our fleet, mainly to cover compliance costs, which include those
costs incurred by Capital Ship Management to remain in compliance with the
oil majors’ requirements, including vetting
requirements.
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b.
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With
respect to each vessel in our fleet at the time of our IPO, the management
agreement has an initial term of approximately five years beginning from
when each vessel commenced operations through and including the date of
its next scheduled special or intermediate survey and includes the
expenses for such special or intermediate survey, as applicable, and
related drydocking.
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c.
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With
respect to each vessel that has been or will be subsequently delivered or
acquired the management agreement will have an initial term of
approximately five years from when we take delivery of each
vessel.
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d.
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In
addition to the fixed daily fees payable under the management agreement,
Capital Ship Management is entitled to supplementary remuneration for
additional fees and costs (as defined in our management agreement) of any
direct and indirect expenses it reasonably incurs in providing these
services.
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6.
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Administrative Services
Agreement. We have entered into an administrative services
agreement with Capital Ship Management, pursuant to which Capital Ship
Management will provide certain administrative management services to us.
The agreement has an initial term of five years from the closing date of
our IPO. The services Capital Ship Management provides us with under the
agreement include, among others (a) bookkeeping, audit and accounting
services, (b) legal and insurance services, (c) administrative and
clerical services including information technology services, (d) banking
and financial services, (e) advisory services and (f), client and investor
relations services. We reimburse Capital Ship Management for reasonable
costs and expenses incurred in connection with the provision of these
services within 15 days after Capital Ship Management submits to us
an invoice for such costs and expenses, together with any supporting
detail that may be reasonably required. Further to the provisions of the
administrative services agreement and subject to its terms we have also
entered into a five-year Information Technology Services dated April 3,
2007 to clarify the terms under which certain information technology
services are to be provided to us.
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7.
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Share Purchase
Agreement. In connection with our IPO, we entered into a share
purchase agreement with Capital Maritime to purchase its interests in the
subsidiaries that owned the seven vessels and related charters that
comprised our contracted fleet at the time of the IPO. At this time, we
have completed the purchase of five of these vessels and expect delivery
of the final two to take place in June and August of 2008 respectively.
Please read “Item 4B: Business—Overview—Our Fleet” for more information on
these acquisitions.
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8.
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Related-Party Loans.
For the financing of the construction of five of the vessels in our
initial fleet, the Atlantas, Aktoras, Avax, Aiolos and Assos, Capital
Maritime had entered into loan agreements with three separate banks on
behalf of the related vessel-owning subsidiaries. Capital Maritime acted
as the borrower and the vessel-owning subsidiaries acted as guarantors in
all of these loan agreements. The five vessels in our initial fleet
described above had been financed in the aggregate amounts of $0, $15.5
million and $95.5 million as of December 31, 2004, 2005 and
2006, respectively. These loans were repaid in their entirety by Capital
Maritime with a portion of the proceeds of our
IPO.
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C.
Interest of Experts and Counsel
Not applicable.
See Item 18 for additional information
required to be disclosed under this Item 8.
Legal
Proceedings
Although we may, from time to time, be
involved in litigation and claims arising out of our operations in the normal
course of business, we are not at present party to any legal proceedings and are
not aware of any proceedings against us, or contemplated to be brought against
us. We maintain insurance policies with insurers in amounts and with coverage
and deductibles as our board of directors believes are reasonable and prudent.
We expect that these claims would be covered by insurance, subject to customary
deductibles. Those claims, even if lacking merit, could result in the
expenditure of significant financial and managerial resources.
Cash
Distribution Policy
Rationale
for Our Cash Distribution Policy
Our cash
distribution policy reflects a basic judgment that our unitholders will be
better served by our distributing our cash available (after deducting expenses,
including estimated maintenance and replacement capital expenditures and
reserves) rather than retaining it. Because we believe we will generally finance
any expansion capital expenditures from external financing sources, we believe
that our investors are best served by our distributing all of our available
cash. Our cash distribution policy is consistent with the terms of our
partnership agreement, which requires that we distribute all of our available
cash quarterly (after deducting expenses, including estimated maintenance and
replacement capital expenditures and reserves). To that effect, our board of
directors unanimously determined to distribute available cash amounting to $39.3
million to our unitholders through an exceptional non-recurring distribution of
$1.05 per unit for the fourth quarter of 2008, including a payment of $12.7
million for IDRs held by our general partner. Our board of directors determined
that the payment of such a distribution was in our best interest. See
“Termination of the Subordination Period” below for more details regarding such
distribution’s effects.
Limitations
on Cash Distributions and Our Ability to Change Our Cash Distribution
Policy
There is no guarantee that unitholders
will receive quarterly distributions from us. Our distribution policy is subject
to certain restrictions and may be changed at any time, including:
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●
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Our
unitholders have no contractual or other legal right to receive
distributions other than the obligation under our partnership agreement to
distribute available cash on a quarterly basis, which is subject to the
broad discretion of our board of directors to establish reserves and other
limitations.
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●
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While
our partnership agreement requires us to distribute all of our available
cash, our partnership agreement, including provisions requiring us to make
cash distributions contained therein, may be amended. Following
the early termination of the subordination period in February 2008, our
partnership agreement, including our cash distribution policy, may be
amended with the approval of a majority of the outstanding common units,
of which Capital Maritime currently owns
45.6%.
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●
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Even
if our cash distribution policy is not modified or revoked, the amount of
distributions we pay under our cash distribution policy and the decision
to make any distribution is determined by our board of directors, taking
into consideration the terms of our partnership agreement and the
establishment of any reserves for the prudent conduct of our
business.
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●
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Under
Section 51 of the Marshall Islands Limited Partnership Act, we may
not make a distribution if the distribution would cause our liabilities to
exceed the fair value of our
assets.
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●
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We
may lack sufficient cash to pay distributions to our unitholders due to
decreases in net revenues or increases in operating expenses, principal
and interest payments on outstanding debt, tax expenses, working capital
requirements, maintenance and replacement capital expenditures or
anticipated cash needs.
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●
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Our
distribution policy will be affected by restrictions on distributions
under our revolving credit facilities which contain material
financial tests and covenants that must be satisfied. Should we be unable
to satisfy these restrictions included in our credit facilities or if we
are otherwise in default under the credit agreements, our ability to make
cash distributions to our unitholders, notwithstanding our stated cash
distribution policy, would be materially adversely
affected.
|
|
|
●
|
If
we make distributions out of capital surplus, as opposed to operating
surplus, such distributions will constitute a return of capital and will
result in a reduction in the quarterly distribution and the target
distribution levels. We do not anticipate that we will make any
distributions from capital surplus.
|
|
|
●
|
If
the ability of our subsidiaries to make any distribution to us is
restricted by, among other things, the provisions of existing and future
indebtedness, applicable partnership and limited liability company laws or
any other laws and regulations, our ability to make distributions to our
unitholders may be restricted.
|
Quarterly
Distributions
Our unitholders are entitled under our
partnership agreement to receive a quarterly distribution to the extent we have
sufficient cash on hand to pay the distribution after we establish cash reserves
and pay fees and expenses. Although we intend to continue to evaluate strategic
acquisitions and to take advantage of our unique relationship with Capital
Maritime in a prudent manner that is accretive to our unitholders and to
long-term distribution growth there is no guarantee that we will pay a quarterly
distribution on our units in any quarter. Even if our cash distribution policy
is not modified or revoked, the amount of distributions paid under our policy
and the decision to make any distribution is determined by our board of
directors, taking into consideration the terms of our partnership agreement and
other factors. We will be prohibited from making any distributions to
unitholders if it would cause an event of default, or an event of default is
existing, under the terms of our credit facilities.
Following the completion of our initial
public offering on April 3, 2007, the following cash distributions have been
declared and paid:
|
Distributions for Quarter
Ended:
|
Amount of Cash
Distributions
|
Cash Distributions per
Unit
|
||
|
Jun.
30, 2007
|
$8.3
million*
|
$0.3626
per unit
|
||
|
Sep.
30, 2007
|
$8.8
million
|
$0.385
per unit
|
||
|
Dec.
31, 2007
|
$9.0
million
|
$0.395
per unit
|
||
|
Mar.
31, 2008
|
$10.1
million
|
$0.400
per unit
|
||
|
Jun.
30, 2008
|
$10.4
million
|
$0.410
per unit
|
||
|
Sep.
30, 2008
|
$10.4
million
|
$0.410
per unit
|
||
|
Dec.
31, 2008
|
$39.3
million**
|
$1.050
per unit***
|
||
|
Mar.
31, 2009
|
$10.4
million
|
$0.410
per unit
|
||
|
Jun.
30, 2009
|
$10.4
million
|
$0.410
per unit
|
||
|
Sep.
30, 2009
|
$10.4
million
|
$0.410
per unit
|
||
|
___________
*
Prorated for the period from April 4, 2007 (our IPO) to June 30,
2007.
**Includes $12.7 million with respect to
incentive distribution rights held by our general partner in accordance
with the terms of our partnership agreement.
***
Exceptional non-recurring cash
distribution.
|
||||
Please
see “Item 4: Information on the Partnership—Business Overview—Recent
Developments” for our current guidance on target distributions for
2010.
Termination
of the Subordination Period
On
January 30, 2009, we announced the payment of an exceptional non-recurring
distribution of $1.05 per unit for the fourth quarter of 2008, bringing annual
distributions to unitholders to $2.27 per unit for the year ended December 31,
2008, a level which under the terms of our partnership agreement resulted in the
early termination of the subordination period and the automatic conversion of
the subordinated units into common units. Our board of directors unanimously
determined that taking into account the totality of relationships between the
parties involved, the payment of this exceptional distribution was in our best
interests taking into consideration the general economic conditions, our
business requirements, risks relating to our business as well as alternative
uses available for our cash. Payment of the exceptional distribution was made on
February 13, 2009 to unitholders of record on February 10, 2009. The
conversion of subordinated units to common units occurred automatically on
February 14, 2009. Following such conversion Capital Maritime owns a 46.6%
interest in us, including 11,304,651 common units and a 2% interest through its
ownership of our general partner, and may significantly impact any vote under
the terms of the partnership agreement.
Incentive
Distribution Rights
Incentive distribution rights represent
the right to receive an increasing percentage of quarterly distributions of
available cash from operating surplus (as defined in our partnership agreement)
after the minimum quarterly distribution and the target distribution levels have
been achieved. Our general partner currently holds the incentive distribution
rights, but may transfer these rights separately from its general partner
interest, subject to restrictions in the partnership agreement. Except for
transfers of incentive distribution rights to an affiliate or another entity as
part of our general partner’s merger or consolidation with or into, or sale of
substantially all of its assets to such entity, the approval of a majority of
our common units (excluding common units held by our general partner and its
affiliates), voting separately as a class, generally is required for a transfer
of the incentive distribution rights to a third party prior to March 31,
2017. Any transfer by our general partner of the incentive distribution rights
would not change the percentage allocations of quarterly distributions with
respect to such rights.
The payment of the exceptional
distribution described above also resulted in a distribution of $12.7 million
with respect to incentive distribution rights held by our general partner, in
accordance with the terms of the partnership agreement. Following discussions
with our board of directors, the general partner agreed to defer receipt of a
portion of the incentive distribution payment and received the $12.7 million of
incentive payments in four equal quarterly installments, with the first
installment having been paid in February 2009.
Percentage
Allocations of Available Cash From Operating Surplus
The following table illustrates the
percentage allocations of the additional available cash from operating surplus
among the unitholders and our general partner up to the various target
distribution levels. The amounts set forth under “Marginal Percentage Interest
in Distributions” are the percentage interests of the unitholders and our
general partner in any available cash from operating surplus we distribute up to
and including the corresponding amount in the column “Total Quarterly
Distribution Target Amount”, until available cash from operating surplus we
distribute reaches the next target distribution level, if any. The percentage
interests shown for the unitholders and our general partner for the minimum
quarterly distribution are also applicable to quarterly distribution amounts
that are less than the minimum quarterly distribution. The percentage interests
shown for our general partner assume that our general partner maintains its 2%
general partner interest and assume our general partner has not transferred the
incentive distribution rights.
|
Marginal Percentage Interest in
Distributions
|
||||||
|
Total Quarterly Distribution Target
Amount
|
Unitholders
|
General Partner
|
||||
|
Minimum
Quarterly Distribution
|
$0.3750
|
98%
|
2%
|
|||
|
First
Target Distribution
|
up
to $0.4313
|
98%
|
2%
|
|||
|
Second
Target Distribution
|
above
$0.4313 up to $0.4688
|
85%
|
15%
|
|||
|
Third
Target Distribution
|
above
$0.4688 up to $0.5625
|
75%
|
25%
|
|||
|
Thereafter
|
above
$0.5625
|
50%
|
50%
|
|||
B.
Significant Changes
No significant changes have occurred
since the date of our Financial Statements included herein except for those set
out below:
|
|
1.
|
On
January 29, 2010 we declared a cash distribution of $0.41 per unit, which
will be paid on February 17, 2010, to unitholders of record on February 8,
2010.
|
Please read Note 14 (Subsequent Events)
to our Financial Statements included herein for more information. regarding the
events described above.
C.
Markets
Our
common units started trading on the Nasdaq Global Market under the symbol “CPLP”
on March 30, 2007. The following table sets forth the high and low closing sales
prices in U.S. Dollars for our common units for each of the periods
indicated.
|
High
|
Low
|
||
|
Year
Ended: December 31,
|
|||
|
2009
|
$11.49
|
$5.21
|
|
|
2008
|
24.93
|
5.51
|
|
|
2007*
|
32.50
|
20.80
|
|
|
Quarter
Ended:
|
|||
|
December
31, 2009
|
10.49
|
7.36
|
|
|
September
30, 2009
|
11.49
|
7.40
|
|
|
June
30, 2009
|
10.49
|
6.36
|
|
|
March
31, 2009
|
10.79
|
5.21
|
|
|
December
31, 2008
|
11.90
|
5.52
|
|
|
September
30, 2008
|
20.50
|
5.51
|
|
|
June
30, 2008
|
22.07
|
18.40
|
|
|
March
31, 2008
|
24.93
|
16.35
|
|
|
Month
Ended:
|
|||
|
December
31, 2009
|
9.23
|
7.46
|
|
|
November
30, 2009
|
9.25
|
7.36
|
|
|
October
31, 2009
|
10.49
|
8.77
|
|
|
September
30, 2009
|
9.30
|
7.50
|
|
|
August
31, 2009
|
10.25
|
7.40
|
|
|
July
31, 2009
|
11.49
|
8.70
|
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
The information required to be
disclosed under Item 10B is incorporated by reference to the following sections
of the prospectus included in our Registration Statement on Form F-1 filed with
the SEC on March 19, 2007: “The Partnership Agreement”, “Description of the
Common Units – The Units”, “Conflicts of Interest and Fiduciary Duties” and “Our
Cash Distribution Policy and Restrictions on Distributions.”
C.
Material Contracts
The following is a summary of each
material contract, other than material contracts entered into in the ordinary
course of business, to which we or any of our subsidiaries is a party, for the
two years immediately preceding the date of this Annual Report, each of which is
included in the list of exhibits in Item 19.
Please
read “Item 7B: Related-Party Transactions” above for further details on the
transactions described below.
|
|
●
|
Amendment
to the $370.0 million revolving credit facility effective for a three year
period from the end of June 2009 to the end of June 2012. Under the terms
of the amendment the fleet loan-to-value covenant was increased to 80%
from 72.5%. It was also agreed to amend the manner in which market
valuations of vessels are conducted. The interest margin was increased to
1.35%-1.45% over LIBOR subject to the level of the asset
covenants. All other terms in the facility remain
unchanged.
|
|
|
●
|
Amendment
to the $350.0 million revolving credit facility effective for a three year
period from the end of June 2009 to the end of June 2012. Under the terms
of the amendment the fleet loan-to-value covenant was increased to 80%
from 72.5%. It was also agreed to amend the manner in which market
valuations of vessels are conducted. The interest margin was increased to
135-145 bps over LIBOR subject to the level of the asset
covenants. All other terms in the facility remain
unchanged.
|
|
|
●
|
Share
Purchase Agreement dated April 13, 2009 with Capital Maritime to acquire
all of its interest in the wholly owned subsidiary that owns the M/T
Ayrton II, one of the vessels identified under our Omnibus Agreement with
Capital Maritime, in exchange for all of our interest in our wholly owned
subsidiary that owns the M/T Atrotos, We paid an additional consideration
of $4.0 million to Capital Maritime and remained responsible for any costs
associated with the delivery of the vessel to Capital Maritime. Please see
“Item 5B: Operating and Financial Review and Prospects—Liquidity and
Capital Resources—Net Cash Used in Investing Activities” and Note 1 (Basis
of Presentation and General Information) to our Financial Statements
included herein for more information regarding this acquisition, including
a detailed explanation of how it was accounted
for.
|
|
|
●
|
Share
Purchase Agreement dated April 7, 2009 with Capital Maritime to acquire
all of its interest in the wholly owned subsidiary that owns the M/T
Agamemnon II, one of the vessels identified under our Omnibus Agreement
with Capital Maritime, in exchange for all of the interest in our wholly
owned subsidiary that owns the M/T Assos. We paid an additional
consideration of $4.0 million to Capital Maritime and remained responsible
for any costs associated with the delivery of the vessel to Capital
Maritime. Please see “Item 5B: Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Net Cash Used in Investing
Activities” and Note 1 (Basis of Presentation and General Information) to
our Financial Statements included herein for more information regarding
this acquisition, including a detailed explanation of how it was accounted
for.
|
|
|
●
|
Agreement
with Capital GP L.L.C. re IDRs dated January 30, 2009, whereby our general
partner agreed to defer receipt of a portion of the $12.7 million
incentive distribution payment it is entitled to under the terms of our
partnership agreement as a result of the payment of an exceptional cash
distribution in February 2009.
|
|
|
●
|
Share
Purchase Agreement dated April 30, 2008 with Capital Maritime to acquire
all of its interest in the wholly owned subsidiary that owns the M/T
Aristofanis for an aggregate purchase price of $23.0 million. The
transaction was approved by our board of directors following approval by
the conflicts committee of independent directors. Please see “Item 5B:
Operating and Financial Review and Prospects—Liquidity and Capital
Resources—Net Cash Used in Investing Activities” and Note 1 (Basis of
Presentation and General Information) to our Financial Statements included
herein for more information regarding this acquisition, including a
detailed explanation of how it was accounted
for.
|
|
|
●
|
Share
Purchase Agreement dated March 27, 2008 with Capital
Maritime to acquire all of its interest in the wholly owned subsidiary
that owns the M/T Amore Mio II for an aggregate purchase price of $95.0
million. The transaction was approved by our board of directors following
approval by the conflicts committee of independent directors. Please see
“Item 5B: Operating and Financial Review and Prospects—Liquidity and
Capital Resources—Net Cash Used in Investing Activities” and Note 1 (Basis
of Presentation and General Information) to our Financial Statements
included herein for more information regarding this acquisition, including
a detailed explanation of how it was accounted
for.
|
|
|
●
|
Share
Purchase Agreement dated September 24, 2007 with Capital Maritime to
acquire all of its interest in the wholly owned subsidiary that owns the
M/T Attikos for an aggregate purchase price of $23.0 million. The transaction was approved by our board
of directors following approval by the conflicts committee of independent
directors.
|
|
|
●
|
Revolving
Facility Agreement, dated March 19, 2008, as amended, for a 10-year
revolving credit facility of up to $350.0 million with HSH Nordbank AG
which is non-amortizing until March 2013. The credit facility bears
interest at US$ LIBOR plus a margin of 1.35-1.45%, depending on the level
of the asset covenants, and may be used to
finance a portion of the acquisition price of certain identified vessels
currently in Capital Maritime’s fleet which we may elect to acquire in the
future. We may also use this facility to finance up to 50% of the purchase
price of any potential future purchases of modern tanker vessels from
Capital Maritime or any third parties. To date, we have used $107.5 million of this
facility to fund part of the acquisition price of the M/T Amore Mio II,
M/T Aristofanis, M/T Aristotelis II, and M/T Aris II from Capital
Maritime. Please read “Item 5B: Operating and Financial Review and
Prospects —Liquidity and Capital Resources—Revolving Credit Facilities”
for a full description of this credit
facility.
|
|
|
●
|
Revolving
Facility Agreement, dated March 22, 2007, as amended, for a 10-year
revolving credit facility of up to $370.0 million with HSH Nordbank
AG which is non-amortizing until June 2012. The credit facility bears
interest at US$ LIBOR plus a margin of 1.35-1.45%, depending on the level
of the asset covenants. The credit facility may be used for acquisitions
and for general partnership purposes. Our obligations under the facility
are secured by first-priority mortgages on 14 product tankers.
Please read “Item 5B: Operating and Financial Review and Prospects
—Liquidity and Capital Resources—Revolving Credit Facilities” for a full
description of the existing credit
facility.
|
D.
Exchange Controls and Other Limitations Affecting Unitholders
We are not aware of any governmental
laws, decrees or regulations, including foreign exchange controls, in the
Republic of The Marshall Islands that restrict the export or import of capital,
or that affect the remittance of dividends, interest or other payments to
non-resident holders of our units. We are not aware of any limitations on the
right of non-resident or foreign owners to hold or vote our units imposed
by the laws of the Republic of The Marshall Islands or our partnership
agreement.
E.
Taxation
Marshall
Islands Taxation
The following is a discussion of
the material Marshall Islands tax consequences of our activities to unitholders
who do not reside in, maintain offices in or engage in business in the Marshall
Islands (“non-resident holders”). Because we and
our subsidiaries do not, and we do not expect that we, or
our subsidiaries will, conduct business or operations in the Marshall
Islands, under current Marshall Islands law non-resident holders of our
securities will not be subject to Marshall Islands taxation or withholding on
distributions, including upon a return of capital, we make to such non-resident
holders. In addition, non-resident holders will not be subject to
Marshall Islands stamp, capital gains or other taxes on the purchase, ownership
or disposition of our securities, and will not be required by the Republic of
The Marshall Islands to file a tax return relating to such
securities.
Taxation
of the Partnership
Because we and our subsidiaries do
not, and we do not expect that we or our subsidiaries will, conduct
business or operations in the Marshall Islands, under current Marshall Islands
law, neither we nor our subsidiaries will be subject to income, capital
gains, profits or other taxation. As a result, distributions by
our subsidiaries to us will not be subject to Marshall Islands
taxation.
United
States Taxation
The following is a discussion of the
material U.S. federal income tax considerations that may be relevant to
unitholders. This discussion is based upon provisions of the Code, Treasury
Regulations, and current administrative rulings and court decisions, all as
currently in effect or existence on the date of this Annual Report and all of
which are subject to change, possibly with retroactive effect. Changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below.
The following discussion applies only
to beneficial owners of our units that own the units as “capital
assets”
(generally, for investment purposes) and does not comment on all aspects of U.S.
federal income taxation which may be important to particular unitholders in
light of their individual circumstances, such as unitholders subject to special
tax rules (e.g., financial institutions, insurance companies, broker-dealers,
tax-exempt organizations, or former citizens or long-term residents of the
United States), persons that will hold the units as part of a straddle, hedge,
conversion, constructive sale, or other integrated transaction for U.S. federal
income tax purposes, persons that own 10.0% or more of our units, partnerships
or entities classified as partnerships for U.S. federal income tax
purposes or their partners, or persons that have a functional currency
other than the U.S. Dollar, all of whom may be subject to tax rules that differ
significantly from those summarized below. If a partnership or other entity
classified as a partnership for U.S. federal income tax purposes holds our
units, the tax treatment of a partner thereof will generally depend upon the
status of the partner and upon the activities of the partnership. If you are a
partner in a partnership holding our units, you should consult your tax
advisor.
No ruling has been or will be requested
from the IRS regarding any matter affecting us or our unitholders. The
statements made here may not be sustained by a court if contested by the
IRS.
This discussion does not contain
information regarding any U.S. state or local, estate or alternative minimum tax
considerations concerning the ownership or disposition of our units. Each
unitholder is urged to consult its tax advisor regarding the U.S. federal,
state, local and other tax consequences of the ownership or disposition of our
units.
Taxation
of the Partnership Election to be Taxed as a Corporation
We have elected to be taxed as a
corporation for U.S. federal income tax purposes. As such, among other
consequences, U.S. Holders (as defined below) will not directly be subject to
U.S. federal income tax on our income, but rather will be subject to U.S.
federal income tax on distributions received from us and dispositions of units
as described below. As a corporation, we may be subject to
U.S. federal income tax on our income as discussed below.
Taxation
of Operating Income
We expect that substantially all of our
gross income will continue to be attributable to the transportation of crude oil
and related oil products. For this purpose, gross income attributable
to transportation (or “Transportation Income”) includes income derived from, or
in connection with, the use (or hiring or leasing for use) of a vessel to
transport cargo, or the performance of services directly related to the use of
any vessel to transport cargo, and thus includes both time charter or bareboat
charter income.
Transportation Income that is
attributable to transportation that begins or ends, but that does not both begin
and end, in the United States (or “U.S. Source International Transportation
Income”) will be considered to be 50.0% derived from sources within the United
States. Transportation Income attributable to transportation that
both begins and ends in the United States (or “U.S. Source Domestic
Transportation Income”) will be considered to be 100.0% derived from sources
within the United States. Transportation Income attributable to
transportation exclusively between non-U.S. destinations will be considered to
be 100% derived from sources outside the United
States. Transportation Income derived from sources outside the United
States generally will not be subject to U.S. federal income tax.
Based on our current operations, we do
not expect to have U.S. Source Domestic Transportation
Income. However, certain of our activities give rise to U.S. Source
International Transportation Income, and future expansion of our operations
could result in an increase in the amount of U.S. Source International
Transportation Income, as well as give rise to U.S. Source Domestic
Transportation Income, all of which could be subject to U.S. federal income
taxation as discussed below.
The
Section 883 Exemption
In general, the Section 883 Exemption
provides that if a non-U.S. corporation satisfies the requirements of Section
883 of the Code and the Treasury Regulations thereunder (or the “Section 883
Regulations”), it will not be subject to the net basis and branch profits taxes
or the 4.0% gross basis tax described below on its U.S. Source International
Transportation Income. The Section 883 Exemption only applies to U.S.
Source International Transportation Income. As discussed below, we
believe that under our current ownership structure, the Section 883 Exemption
will apply and we will not be taxed on our U.S. Source International
Transportation Income. The Section 883 Exemption does not apply to
U.S. Source Domestic Transportation Income.
We will qualify for the Section 883
Exemption if, among other matters, we meet the following three
requirements:
|
|
●
|
We
are organized in a jurisdiction outside the
United States that grants an equivalent exemption from tax to corporations
organized in the United States (an “Equivalent
Exemption”);
|
|
|
●
|
We satisfy the “Publicly Traded Test” (as
described below); and
|
|
|
●
|
We meet certain substantiation, reporting
and other requirements.
|
The Publicly Traded Test requires that
one or more classes of equity representing more than 50.0% of the voting power
and value in a non-U.S. corporation be “primarily and regularly traded” on an
established securities market either in the United States or in a jurisdiction
outside the United States that grants an Equivalent Exemption. The
Section 883 Regulations provide, in pertinent part, that equity interests in a
non-U.S. corporation will be considered to be “primarily traded” on an
established securities market in a given country if the number of units of each
class of equity that are traded during any taxable year on all established
securities markets in that country exceeds the number of units in each such
class that are traded during that year on established securities markets in any
other single country. Equity of a non-U.S. corporation will be
considered to be “regularly traded” on an established securities market under
the Section 883 Regulations if one or more classes of equity of the corporation
that, in the aggregate, represent more than 50.0% of the combined vote and value
of the non-U.S. corporation are listed on such market and certain trading volume
requirements are met or deemed met as described below. For this
purpose, if one or more “5.0% unitholders” (i.e., a unitholder holding, actually
or constructively, at least 5.0% of the vote and value of a class of equity) own
in the aggregate 50.0% or more of the vote and value of a class of equity (the
“Closely Held Block”), such class of equity will not be treated as primarily and
regularly traded on an established securities market (the “Closely Held Block
Exception”).
We are organized under the laws of the
Republic of The Marshall Islands. The U.S. Treasury Department has
recognized the Republic of The Marshall Islands as a jurisdiction that grants an
Equivalent Exemption. Consequently, our U.S. Source International Transportation
Income (including, for this purpose, any such income earned by our subsidiaries
that have properly elected to be treated as partnerships or disregarded as
entities separate from us for U.S. federal income tax purposes) will be exempt
from U.S. federal income taxation provided we meet the Publicly Traded
Test. In addition, since our
units are only traded on the Nasdaq Global Market, which is considered to be an
established securities market, our units will be deemed to be “primarily traded”
on an established securities market. In addition since our units
represent more than 50.0% of our vote and value they will be considered to be
“regularly traded” on an established securities market.
We believe we meet the trading volume
requirements of Section 883 Exemption because the pertinent
regulations provide that trading volume requirements will be deemed to be met
with respect to a class of equity traded on an established securities market in
the United States where, as will be the case for our units, the units are
regularly quoted by dealers who regularly and actively make offers, purchases
and sales of such units to unrelated persons in the ordinary course of
business. These conclusions, however, are based upon legal authorities
that do not expressly contemplate an organizational structure such as
ours. In particular, although we have elected to be treated as a
corporation for U.S. federal income tax purposes, for corporate law purposes we
are organized as a limited partnership under Marshall Islands law and our
general partner is responsible for managing our business and affairs and has
been granted certain veto rights over decisions of our board of directors.
Accordingly, it is possible that the IRS could assert that our units do not meet
the “regularly
traded”
test.
In addition, we expect that our units
will not lose eligibility for the Section 883 Exemption as a result of the
Closely Held Block Exemption, because our partnership agreement provides that
the voting rights of any 5.0% unitholders (other than our general partner, its
affiliates, their transferees and persons who acquired such units with the
approval of our board of directors) are limited to a 4.9% voting interest in us
regardless of how many units are held by that 5.0% unitholder. If
Capital Maritime and our general partner own 50% or more of our units, they will
provide the necessary documents to establish an exception to the application of
the Closely Held Block Exemption. This exception is available when
shareholders residing in a jurisdiction granting an Equivalent Exemption and
meeting certain other requirements own sufficient shares in the Closely Held
Block to preclude shareholders who have not met such requirements from owning
50.0% or more of the outstanding units.
Thus, although the matter is not free
from doubt, we believe that we will satisfy the Publicly Traded
Test. Should any of the facts described above cease to correct, our
ability to satisfy the test will be compromised.
The
Net Basis Tax and Branch Profits Tax
If we earn U.S. Source International
Transportation Income and the Section 883 Exemption does not apply, the U.S.
source portion of such income may be treated as effectively connected with the
conduct of a trade or business in the United States (or “Effectively Connected
Income”) if we have a fixed place of business in the United States and
substantially all of our U.S. Source International Transportation Income is
attributable to regularly scheduled transportation or, in the case of bareboat
charter income, is attributable to a fixed place of business in the United
States. Based on our current operations, none of our potential U.S.
Source International Transportation Income is attributable to regularly
scheduled transportation or is received pursuant to bareboat charters
attributable to a fixed place of business in the United States. As a
result, we do not anticipate that any of our U.S. Source International
Transportation Income will be treated as Effectively Connected
Income. However, there is no assurance that we will not earn income
pursuant to regularly scheduled transportation or bareboat charters attributable
to a fixed place of business in the United States in the future, which would
result in such income being treated as Effectively Connected
Income. In addition, any U.S. Source Domestic Transportation Income
generally will be treated as Effectively Connected Income.
Any income we earn that is treated as
Effectively Connected Income would be subject to U.S. federal corporate income
tax (the highest statutory rate is currently
35.0%). In addition, a 30.0% branch profits tax imposed under Section
884 of the Code also would apply to such income, and a branch interest tax could
be imposed on certain interest paid or deemed paid by us.
On the sale of a vessel that has
produced Effectively Connected Income, we could be subject to the net basis
corporate income tax and to the 30.0% branch profits tax with respect to our
gain not in excess of certain prior deductions for depreciation that reduced
Effectively Connected Income. Otherwise, we would not be subject to
U.S. federal income tax with respect to gain realized on the sale of a vessel,
provided the sale is considered to occur outside of the United States under U.S.
federal income tax principles.
The
4.0% Gross Basis Tax
If the Section 883 Exemption does not
apply and the net basis tax does not apply, we would be subject to a 4.0% U.S.
federal income tax on the U.S. source portion of our U.S. Source International
Transportation Income, without benefit of deductions.
U.S.
Federal Income Taxation of U.S. Holders
As used herein, the term U.S. Holder means a
beneficial owner of our units that is:
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an
individual U.S. citizen or resident (as determined for U.S. federal income
tax purposes);
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a
corporation or other entity organized under the laws of the United States
or its political subdivisions and classified as a corporation for U.S.
federal income tax purposes;
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an
estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
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a
trust if a court within the United States is able to exercise primary
jurisdiction over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
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Distributions
Subject
to the discussion of the rules applicable to passive foreign investment
companies (or PFICs) below, any distributions made by us with respect to our
units to a U.S. Holder generally will constitute dividends, which may be taxable
as ordinary income or “qualified dividend income” as described in more detail
below, to the extent of our current and accumulated earnings and profits, as
determined under U.S. federal income tax principles. Distributions in excess of
our earnings and profits will be treated first as a nontaxable return of capital
to the extent of the U.S. Holder’s tax basis in its units on a dollar-for-dollar
basis and thereafter as capital gain. U.S. Holders that are corporations
generally will not be entitled to claim a dividends received deduction with
respect to any distributions they receive from us. Dividends paid with respect
to our units generally will be treated as “passive category income” for purposes
of computing allowable foreign tax credits for U.S. federal income tax
purposes.
Dividends
paid on our units to a U.S. Holder who is an individual, trust or estate (or a
U.S. Individual Holder) will be treated as “qualified dividend income” that is
taxable to such U.S. Individual Holder at preferential capital gain tax rates
(through 2010) provided that: (i) our units are readily tradable on an
established securities market in the United States (such as the Nasdaq Global
Market on which our units are traded); (ii) we are not a PFIC for the taxable
year during which the dividend is paid or the immediately preceding taxable year
(which we do not believe we are, have been or will be, as discussed below);
(iii) the U.S. Individual Holder has owned the units for more than 60 days in
the 121-day period beginning 60 days before the date on which the units become
ex-dividend (and has not entered into certain risk limiting transactions with
respect to such units); and (iv) the U.S. Individual Holder is not under an
obligation to make related payments with respect to positions in substantially
similar or related property. There is no assurance that any dividends paid on
our units will be eligible for these preferential rates in the hands of a U.S.
Individual Holder, and any dividends paid on our units that are not eligible for
these preferential rates will be taxed as ordinary income to a U.S. Individual
Holder. In the absence of legislation extending the term of the preferential tax
rates for qualified dividend income, all dividends received by a taxpayer in tax
years beginning January 1, 2011 or later will be taxed at rates applicable to
ordinary income.
Special
rules may apply to any “extraordinary dividend” paid by us. An extraordinary
dividend is, generally, a dividend with respect to a unit if the amount of the
dividend is equal to or in excess of 10 percent of a unitholder’s adjusted basis
(or fair market value in certain circumstances) in such unit. If we pay an
“extraordinary dividend” on our units that is treated as “qualified dividend
income”, then any loss derived by a U.S. Individual Holder from the sale or
exchange of such units will be treated as long-term capital loss to the extent
of the amount of such dividend.
In
addition, under previously proposed legislation, the preferential rate of
federal income tax currently imposed on qualified dividend income would be
denied with respect to dividends received form a non-U.S. corporation, unless
the non-U.S. corporation either is eligible for benefits of a comprehensive
income tax treaty with the United States or is created or organized under the
laws of a foreign country which has a comprehensive income tax system. Because
the Marshall Islands has not entered into a comprehensive income tax treaty with
the United States and imposes only limited taxes on corporations organized under
its laws, it is unlikely that we could satisfy either of these requirements.
Consequently, if this legislation were enacted the preferential tax rates
imposed on qualified dividend income may no longer be applicable to dividends
received from us. Any dividends paid on our units that are not eligible for
the preferential rate will be taxed as ordinary income to a U.S. Individual
Holder. As of the date hereof, it is not possible to predict with any certainty
whether this previously proposed legislation will be reintroduced or
enacted.
Sale,
Exchange or other Disposition of Units
Subject to the discussion of PFICs
below, a U.S. Holder generally will recognize taxable gain or loss upon a sale,
exchange or other disposition of our units in an amount equal to the difference
between the amount realized by the U.S. Holder from such sale, exchange or other
disposition and the U.S. Holder’s tax basis in such units. Such gain or loss
will be treated as long-term capital gain or loss if the U.S. Holder’s holding
period is greater than one year at the time of the sale, exchange or other
disposition. Such capital gain or loss will generally be treated as U.S. source
income or loss, as applicable, for U.S. foreign tax credit purposes. A U.S.
Holder’s ability to deduct capital losses is subject to certain
limitations.
PFIC
Status and Significant Tax Consequences
Special and adverse U.S. federal income
tax rules apply to a U.S. Holder that owns an equity interest in a non-U.S.
entity taxed as a corporation and classified as a PFIC for U.S. federal income
tax purposes. In general, we will be treated as a PFIC with respect to a U.S.
Holder if, for any taxable year in which such holder held our units,
either:
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at
least 75.0% of our gross income (including the gross income of our
vessel-owning subsidiaries) for such taxable year consists of passive
income (e.g., dividends, interest, capital gains and rents derived other
than in the active conduct of a rental business),
or
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at
least 50.0% of the average value of the assets held by us (including the
assets of our vessel-owning subsidiaries) during such taxable year
produce, or are held for the production of, passive
income.
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Income earned, or deemed earned, by us
in connection with the performance of services would not constitute passive
income. By contrast, rental income would generally constitute “passive income”
unless we were treated under specific rules as deriving our rental income in the
active conduct of a trade or business.
Based on our current and projected
methods of operation, we believe that we are not currently PFIC, nor do we
expect to become a PFIC. Although there is no legal authority directly on point,
and we are not obtaining a ruling from the IRS on this issue, we will take the
position that, for purposes of determining whether we are a PFIC, the gross
income we derive or are deemed to derive from the time and spot chartering
activities of our wholly owned subsidiaries constitutes services income, rather
than rental income. Correspondingly, such income should not constitute passive
income, and the assets that we or our wholly owned subsidiaries own and operate
in connection with the production of such income, in particular, the vessels we
or our subsidiaries own that are subject to time charters, should not constitute
passive assets for purposes of determining whether we were a
PFIC. Certain vessels in our fleet are engaged in activities that may
be characterized as passive for PFIC purposes and the income from that portion
of our fleet may be treated as passive income for PFIC purposes. We believe
there is legal authority supporting our position, consisting of case law and IRS
pronouncements concerning the characterization of income derived from time
charters as service income for other tax purposes. However, there is
no legal authority specifically relating to the statutory provisions governing
PFICs or relating to circumstances substantially similar to
ours. Moreover, a recent case by the U.S. Court of Appeals for the
Fifth Circuit held that, contrary to the position of the IRS in that case, and
for purposes of a different set of rules under the Code, income received under a
time charter of vessels should be treated as rental income rather than services
income. If the reasoning of the Fifth Circuit case were extended to the PFIC
context, the gross income we derive or are deemed to derive from our time
chartering activities would be treated as rental income, and we would probably
be a PFIC. In addition, although we intend to conduct our affairs in
a manner to avoid being classified as a PFIC with respect to any taxable year,
we cannot assure you that the nature of our operations will not change in the
future.
As discussed more fully below, if we
were to be treated as a PFIC for any taxable year, a U.S. Holder would be
subject to different taxation rules depending on whether the U.S. Holder makes
an election to treat us as a “Qualified Electing Fund”, which election we refer
to as a “QEF election.” As an alternative to making a QEF election, a U.S.
Holder should be able to make a “mark-to-market” election with respect to our
units, as discussed below.
Taxation
of U.S. Holders Making a Timely QEF Election
If a U.S.
Holder makes a timely QEF election, which U.S. Holder we refer to as an
“Electing Holder,” the Electing Holder must report each year for U.S. federal
income tax purposes his pro rata share of our ordinary earnings and our net
capital gain, if any, for our taxable year that ends with or within the taxable
year of the Electing Holder, regardless of whether or not distributions were
received from us by the Electing Holder. The Electing Holder’s adjusted tax
basis in the units will be increased to reflect taxed but undistributed earnings
and profits. Distributions of earnings and profits that had been previously
taxed will result in a corresponding reduction in the adjusted tax basis in the
units and will not be taxed again once distributed. An Electing Holder would
generally recognize capital gain or loss on the sale, exchange or other
disposition of our units. A U.S. Holder would make a QEF election with respect
to any year that we are a PFIC by filing one copy of IRS Form 8621 with his U.S.
federal income tax return and a second copy in accordance with the instructions
to such form. If contrary to our expectations, we determine that we are
treated as a PFIC for any taxable year, we will provide each U.S. Holder
with all necessary information in order to make the QEF election described
above.
Taxation
of U.S. Holders Making a “Mark-to-Market” Election
Alternatively, if we were to be treated
as a PFIC for any taxable year and, as we anticipate, our units were treated as
“marketable stock”, a U.S. Holder would be allowed to make a “mark-to-market”
election with respect to our units, provided the U.S. Holder completes and files
IRS Form 8621 in accordance with the relevant instructions and related Treasury
Regulations. If that election is made, the U.S. Holder generally would include
as ordinary income in each taxable year the excess, if any, of the fair market
value of the units at the end of the taxable year over such holder’s adjusted
tax basis in the units. The U.S. Holder would also be permitted an ordinary loss
in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the
units over the fair market value thereof at the end of the taxable year, but
only to the extent of the net amount previously included in income as a result
of the mark-to-market election. A U.S. Holder’s tax basis in his units would be
adjusted to reflect any such income or loss amount. Gain realized on the sale,
exchange or other disposition of our units would be treated as ordinary income,
and any loss realized on the sale, exchange or other disposition of the units
would be treated as ordinary loss to the extent that such loss does not exceed
the net mark-to-market gains previously included by the U.S.
Holder.
Taxation
of U.S. Holders Not Making a Timely QEF or Mark-to-Market
Election
Finally, if we were to be treated as a
PFIC for any taxable year, a U.S. Holder who does not make either a QEF election
or a “mark-to-market” election for that year, whom we refer to as a
“Non-Electing Holder,” would be subject to special rules with respect to (1) any
excess distribution (i.e., the portion of any distributions received by the
Non-Electing Holder on our units in a taxable year in excess of 125.0% of the
average annual distributions received by the Non-Electing Holder in the three
preceding taxable years, or, if shorter, the Non-Electing Holder’s holding
period for the units), and (2) any gain realized on the sale, exchange or other
disposition of our units. Under these special rules:
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the
excess distribution or gain would be allocated ratably over the
Non-Electing Holder’s aggregate holding period for the
units;
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the
amount allocated to the current taxable year and any year prior to the
year we were first treated as a PFIC with respect to the Non-Electing
Holder would be taxed as ordinary income;
and
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the
amount allocated to each of the other taxable years would be subject to
tax at the highest rate of tax in effect for the applicable class of
taxpayer for that year, and an interest charge for the deemed deferral
benefit would be imposed with respect to the resulting tax attributable to
each such other taxable year.
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These
penalties would not apply to a qualified pension, profit sharing or other
retirement trust or other tax-exempt organization that did not borrow money or
otherwise utilize leverage in connection with its acquisition of our units. If
we were treated as a PFIC for any taxable year and a Non-Electing Holder who is
an individual dies while owning our units, such holder’s successor generally
would not receive a step-up in tax basis with respect to such
units.
U.S.
Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our units (other
than a partnership, including any entity or arrangement treated as a partnership
for U.S. federal income tax purposes) that is not a U.S. Holder is a Non-U.S.
Holder.
Distributions
Distributions
we pay to a Non-U.S. Holder will not be subject to U.S. federal income tax or
withholding tax if the Non-U.S. Holder is not engaged in a U.S. trade or
business. If the Non-U.S. Holder is engaged in a U.S. trade or business,
distributions we pay will be subject to U.S. federal income tax to the extent
those distributions constitute income effectively connected with that Non-U.S.
Holder’s U.S. trade or business. However, distributions paid to a Non-U.S.
Holder who is engaged in a trade or business may be exempt from taxation under
an income tax treaty if the income represented thereby is not attributable to a
U.S. permanent establishment maintained by the Non-U.S. Holder.
Disposition
of Units
The U.S. federal income taxation of
Non-U.S. Holders on any gain resulting from the disposition of our units is
generally the same as described above regarding distributions. However,
individual Non-U.S. Holders may be subject to tax on gain resulting from the
disposition of our units if they are present in the United States for 183 days
or more during the taxable year in which those shares are disposed and meet
certain other requirements.
Backup
Withholding and Information Reporting
In general, payments of distributions
on our units or the proceeds of a disposition of our units to a non-corporate
U.S. Holder will be subject to information reporting requirements. These
payments to a non-corporate U.S. Holder also may be subject to backup
withholding, if the non-corporate U.S. Holder:
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fails
to provide an accurate taxpayer identification
number;
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is
notified by the IRS that he has failed to report all interest or corporate
distributions required to be shown on its U.S. federal income tax returns;
or
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in
certain circumstances, fails to comply with applicable certification
requirements.
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Non-U.S.
Holders may be required to establish their exemption from information reporting
and backup withholding on payments within the United States by certifying their
status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable.
Backup withholding is not an additional
tax. Rather, a unitholder generally may obtain a credit for any amount withheld
against his liability for U.S. federal income tax (and a refund of any amounts
withheld in excess of such liability) by filing a return with the
IRS.
F.
Dividends and Paying Agents
Not applicable.
G.
Safe Harbor
Not applicable.
H.
Documents on Display
We have filed with the SEC a
registration statement on Form F-1 regarding the common units. This Annual
Report does not contain all of the information found in the registration
statement. For further information regarding us and our common units, you may
wish to review the full registration statement, including its exhibits. The
registration statement, including the exhibits, may be inspected and copied at
the public reference facilities maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Copies of this material can also be obtained upon
written request from the Public Reference Section of the SEC at 100 F Street,
N.E, Washington, D.C. 20549, at prescribed rates or from the SEC’s web site on
the Internet at http://www.sec.gov free of charge. Please call the SEC at
1-800-SEC-0330 for further information on public reference room. Our
registration statement can also be inspected and copied at the offices of the
Nasdaq Global Market, One Liberty Plaza, New York, New York 10006.
I.
Subsidiary Information
Please see Exhibit 8.1 to this Annual
Report for a list of our significant subsidiaries as of December 31,
2009.
Our
Risk Management Policy
Our policy is to continuously monitor
our exposure to business risks, including the impact of changes in interest
rates and currency rates as well as inflation on earnings and cash flows. We
intend to assess these risks and, when appropriate, take measures to minimize
our exposure to the risks.
Foreign
Exchange Risk
We do not
have a material currency exposure risk. We
generate all of our revenues in U.S. Dollars and incur less than 5% of our
expenses in currencies other than U.S. Dollars. For accounting purposes,
expenses incurred in currencies other than the U.S. Dollar are translated into
U.S. Dollars at the exchange rate prevailing on the date of each transaction. As
of December 31, 2009, less than 5% of liabilities were denominated in currencies
other than U.S. Dollars (mainly in Euros). These liabilities were translated
into U.S. Dollars at the exchange rate prevailing on December 31, 2009. We have
not hedged currency exchange risks and our operating results could be adversely
affected as a result.
Interest
Rate Risk
The
international tanker industry is capital intensive, requiring significant
amounts of investment, a significant portion of which is provided in the form of
long-term debt. Our current debt contains interest rates that fluctuate with
LIBOR. Our existing credit facility of $370.0 million and $350.0 million bears
floating interest of 1.35% -1.45% per annum over US$ LIBOR. Therefore, we are
exposed to the risk that our interest expense may increase if interest rates
rise.
In order
to hedge our exposure to interest rate changes, we have entered into ten
interest rate swap agreements at varying rates to fix the LIBOR portion of our
interest rate $366.5 million in borrowings drawn down under our existing
facility for a period up to June 2012. We have also entered into four interest
rate swap agreements to fix the LIBOR portion of our interest rate at varying
rates for $107.5 million in borrowings drawn down under our new credit facility
for a period up to March 2013. We intend to swap the LIBOR portion of
any further amounts drawn down under the existing credit facility and the new
credit facility into a fixed rate until the end of the non-amortizing period in
June 2012 and March 2013 respectively. As our interest rate is fixed under the
swap agreements changes in LIBOR during the swapped period would not affect our
interest expense. However, as a result of a market disruption in determining the
cost of funds for our banks, any increases by the banks to their “funding costs”
under our agreements will lead to proportional increases in the relevant
interest amounts interest payable under our agreement on a quarterly basis. The
interest rate for the three month period ended March 31, 2009 has increased by
0.30503% under our existing credit facility and by 0.20786%, under new credit
facility, respectively, in accordance with the terms of each facility. Please
refer to “Item 5B: Operating and Financial Review and Prospects—Liquidity and
Capital Resources—Revolving Credit Facilities” for more information on the
specific rates we have entered into under each swap agreement.
Please read Note 2 (Significant Accounting Policies – Interest Rate
Swap Agreements), Note 5 (Long-Term Debt) and Note 6 (Fair Value of
Financial Instruments) to our Financial Statements included herein, which provide additional information
with respect to our derivative financial instruments and existing debt
agreements.
Concentration
of Credit Risk
Financial instruments which potentially
subject us to significant concentrations of credit risk consist principally of
cash and cash equivalents, interest rate swap agreements, and trade accounts
receivable. We place our cash and cash equivalents, consisting mostly of
deposits, and enter into interest rate swap agreements with creditworthy
financial institutions as rated by qualified rating agencies. For the years
ended December 31, 2009 and December 31, 2008, 81% and 87% of our revenues,
respectively, were derived from two charterers. We do not obtain rights to
collateral to reduce our credit risk. Please refer to “Item 5B: Operating and
Financial Review and Prospects—Liquidity and Capital Resources—Revolving Credit
Facilities” for more information on our interest rate swap
agreements.
Inflation
Inflation has had a minimal impact on
vessel operating expenses, drydocking expenses and general and administrative
expenses to date. However, certain additional fees and costs we (as defined
in our management agreement) are obligated to pay to Capital Ship Management
under our management agreement, which amounted to approximately $3.0 and $1.0
million for the years ended December 31, 2009 and 2008
respectively, may further increase to reflect the continuing
inflationary vessel cost environment. Our management does not consider inflation
to be a significant risk to direct expenses in the current and foreseeable
economic environment. However, in the event that
inflation becomes a significant factor in the global economy, inflationary
pressures would result in increased operating, voyage and financing
costs.
Not Applicable.
None.
None.
a. Disclosure Controls and
Procedures
As of
December 31, 2009, our management (with the participation of our chief executive
officer and chief financial officer) conducted an evaluation pursuant to Rule
13a-15(b) and 15d-15 promulgated under the U.S. Securities Exchange Act of 1934,
as amended (the “Exchange Act”), of the effectiveness of the design and
operation of our disclosure controls and procedures. Our management, including
our chief executive and chief financial officer, recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the partnership have
been detected. Further, in the design and evaluation of our disclosure controls
and procedures our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
However, based on this evaluation, our
chief executive officer and chief financial officer concluded that as of
December 31, 2009, our disclosure controls and procedures, which include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports we file or submit under the
Exchange Act is accumulated and communicated to the management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure, were effective to provide
reasonable assurance that information required to be disclosed by us in reports
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
b. Management’s Annual Report on
Internal Control over Financial Reporting
Our management (with the management of
our general partner) is responsible for establishing and maintaining adequate
internal controls over financial reporting. Our internal controls
were designed to provide reasonable assurance as to the reliability of our
financial reporting and the preparation and presentation of our Financial
Statements for external purposes in accordance with accounting principles
generally accepted in the United States.
Our
internal controls over financial reporting includes those policies and
procedures that, 1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; 2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of our Financial Statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made in accordance with authorizations of management and the directors
of our general partnership; and 3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the our assets that could have a material effect on the financial
statements.
Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting based upon the framework in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operating effectiveness of controls and a conclusion on this evaluation.
Based on this evaluation, management believes that our internal control
over financial reporting was effective as of December 31, 2009.
However,
because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements even when determined to be effective and
can only provide reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Deloitte Hadjipavlou, Sofianos &
Cambanis S.A. (“Deloitte”), our independent registered public accounting firm,
has audited the Financial Statements included herein and our internal control
over financial reporting and has issued an attestation report on the
effectiveness of our internal control over financial reporting which is
reproduced in its entirety in Item 15(c) below.
c. Attestation Report of the Registered
Public Accounting Firm.
To the
Board of Directors and Unitholders of Capital Product Partners L.P., Majuro,
Republic of the Marshall Islands
We have audited the internal control
over financial reporting of Capital Product Partners L.P. (the “Partnership”) as
December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The Partnership’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
“Management’s Annual Report on Internal Control over Financial Reporting.”
Our responsibility is to express an opinion on the Partnership’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over
financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Partnership
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated and combined financial
statements as of and for the year ended December 31, 2009 of the
Partnership and our report dated February 4, 2010 expressed an
unqualified opinion on those financial statements and included explanatory
paragraphs relating to: 1) the formation of Capital Product Partners L.P. and
the preparation of the combined financial statements attributable to
the period through April 4, 2007 from the separate records maintained by Capital
Maritime & Trading Corp., 2) the preparation of the portion of the
combined financial statements attributable to Ross Shipmanagement Co., Baymont
Enterprises Incorporated, Forbes Maritime Co., Mango Finance Co., and Navarro
International S.A., prior to the vessel acquisition by the Partnership, from the
separate records maintained by Capital Maritime & Trading Corp., and 3) the
retroactive adjustments to previously-issued combined financial statements
resulting from transactions between entities under common control.
/s/
Deloitte. Hadjipavlou, Sofianos, & Cambanis S.A.
Athens,
Greece
February
4, 2010
d. Changes in Internal Control over
Financial Reporting
There
have been no changes in our internal controls over financial reporting during
the year covered by this Annual Report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Our board of directors has determined
that director Abel Rasterhoff, the chairman of our audit committee, qualifies as
an audit committee financial expert for purposes of the U.S. Sarbanes-Oxley Act
and is independent under applicable Nasdaq Global Market and SEC
standards.
Our board of directors has adopted a
Code of Business Conduct and Ethics that includes a Code of Ethics that applies
to our chief executive officer, chief financial officer, principal accounting
officer and persons performing similar functions. This document is available
under “Corporate Governance” in the Investor Relations area of our web site
(www.capitalpplp.com). We will also provide a hard copy of our code
of ethics free of charge upon written request. We intend to disclose, under
“Corporate Governance” in the Investor Relations area of our web site, any
waivers to or amendments of the Code of Business Conduct and Ethics for the
benefit of any of our directors and executive officers within five business days
of such waiver or amendment.
Our principal accountant for 2009 and
2008 was Deloitte. The following table shows the fees we paid or accrued for
audit services provided by Deloitte for these periods (in thousands of U.S.
Dollars).
|
Fees
|
2009
|
2008
|
||||||
|
Audit
Fees (1)
|
$ | 387 | $ | 585 | ||||
|
Audit-Related
Fees
|
- | - | ||||||
|
Tax Fees (2)
|
33 | 156 | ||||||
|
Total
|
$ | 420 | $ | 741 | ||||
|
|
(1)
|
Audit
fees represent fees for professional services provided in connection with
the audit of our Financial Statements included herein, review of our
quarterly consolidated financial statements and audit services provided in
connection with other regulatory
filings.
|
|
|
(2)
|
Tax
fees represent fees for professional services provided in connection with
various U.S. income tax compliance and information reporting
matters.
|
The audit
committee of our board of directors has the authority to pre-approve permissible
audit-related and non-audit services not prohibited by law to be performed by
our independent auditors and associated fees. Engagements for proposed services
either may be separately pre-approved by the audit committee or entered into
pursuant to detailed pre-approval policies and procedures established by the
audit committee, as long as the audit committee is informed on a timely basis of
any engagement entered into on that basis. The audit committee separately
pre-approved all engagements and fees paid to our principal accountant in 2009
and 2008.
None.
During
the year ended December 31, 2009, neither the issuer nor any affiliated persons
purchased any equity securities. As of December 31, 2009, Capital Maritime owns
a 46.6% interest in us, including 11,304,651 common units and a 2% interest in
us through its ownership of our general partner.
Not applicable.
The Nasdaq Global Market requires
limited partnerships with listed units to comply with its corporate governance
standards. As a foreign private issuer, we are not required to comply with all
of the rules that apply to listed U.S. limited partnerships. However, we have
generally chosen to comply with most of the Nasdaq Global Market’s corporate
governance rules as though we were a U.S. limited partnership. Although we are
not required to have a majority of independent directors on our board of
directors or to establish a compensation committee or a nominating/corporate
governance committee our board of directors has established an audit committee
and a conflicts committee comprised solely of independent directors.
Accordingly, we do not believe there are any significant differences between our
corporate governance practices and those that would typically apply to a U.S.
domestic issuer that is a limited partnership under the corporate governance
standards of the Nasdaq Global Market. Please see “Item 6C: Board Practices” and
“Item 10B: Memorandum and Articles of Association” for more detail regarding our
corporate governance practices.
Not Applicable.
|
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
CAPITAL
PRODUCT PARTNERS L.P.
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
and Combined Balance Sheets as of December 31, 2009 and
2008
|
F-2
|
|
Consolidated
and Combined Statements of Income for the years ended December 31, 2009,
2008 and 2007
|
F-3
|
|
Consolidated
and Combined Statement of Changes in Partners’ Capital / Stockholders’
Equity for the years ended December 31, 2009, 2008 and
2007
|
F-4
|
|
Consolidated
and Combined Statements of Cash Flows for the years ended December 31,
2009, 2008 and 2007
|
F-7
|
|
Notes
to the Consolidated and Combined Financial Statements
|
F-8
|
The
following exhibits are filed as part of this Annual Report:
|
Exhibit
No.
|
Description
|
|
|
1.1
|
Certificate
of Limited Partnership of Capital Product Partners L.P.
(1)
|
|
|
1.2
|
First
Amended and Restated Agreement of Limited Partnership of Capital Product
Partners L.P. (2)
|
|
|
1.3
|
Amendment
to Capital Product Partners Amended and Restated Agreement of Limited
Partnership
|
|
|
1.4
|
Certificate
of Formation of Capital GP L.L.C. (1)
|
|
|
1.5
|
Limited
Liability Company Agreement of Capital GP L.L.C. (1)
|
|
|
1.6
|
Certificate
of Formation of Capital Product Operating GP L.L.C. (1)
|
|
|
4.1
|
Revolving
$370.0 Million Credit Facility dated March 22, 2007 (1)
|
|
|
4.2
|
First
Supplemental Agreement to Revolving $370.0 million Credit Facility dated
September 19, 2007 (3)
|
|
|
4.3
|
Second
Supplemental Agreement to Revolving $370.0 Million Credit Facility dated
June 11, 2008 (4)
|
|
|
4.4
|
Third
Supplemental Agreement to Revolving $370.0 Million Credit Facility dated
April 7, 2009
|
|
|
4.5
|
Fourth
Supplemental Agreement to Revolving $370.0 Million Credit Facility dated
April 8, 2009
|
|
|
4.6
|
Fifth
Supplemental Agreement to Revolving $370.0 Million Credit Facility dated
October 2, 2009
|
|
|
4.7
|
Omnibus
Agreement (1)
|
|
|
4.8
|
Management
Agreement with Capital Ship Management (1)
|
|
|
4.9
|
Amendment
1 to Management Agreement with Capital Ship Management dated
September 24, 2007 (3)
|
|
|
4.10
|
Amendment
2 to Management Agreement with Capital Ship Management dated
March 27, 2008 (3)
|
|
|
4.11
|
Amendment
3 to Management Agreement with Capital Ship Management dated April 30,
2008 (4)
|
|
|
4.12
|
Amendment
4 to Management Agreement with Capital Ship Management dated April 7,
2009
|
|
|
4.13
|
Amendment
5 to Management Agreement with Capital Ship Management dated April 13,
2009
|
|
|
4.14
|
Amendment
6 to Management Agreement with Capital Ship Management dated April 30,
2009
|
|
|
4.15
|
Administrative
Services Agreement with Capital Ship Management (1)
|
|
|
4.16
|
Contribution
and Conveyance Agreement for Initial Fleet (1)
|
|
|
4.17
|
Share
Purchase Agreement for 2007 and 2008 Vessels (1)
|
|
|
4.18
|
Revolving
$350.0 Million Credit Facility dated March 19,
2008 (3)
|
|
|
4.19
|
First
Supplemental Agreement to Revolving $350.0 million Credit Facility dated
October 2, 2009
|
|
|
4.20
|
Share
Purchase Agreement for M/T Attikos dated September 24, 2007
(3)
|
|
|
4.21
|
Share
Purchase Agreement for M/T Amore Mio II dated March 27, 2008
(3)
|
|
|
4.22
|
Share
Purchase Agreement for M/T Aristofanis dated April 30, 2008
(4)
|
|
|
4.23
|
Share
Purchase Agreement for M/T Agamemnon II dated April 3,
2009
|
|
|
4.24
|
Share
Purchase Agreement for M/T Ayrton II dated April 12,
2009
|
|
|
4.25
|
Capital
Product Partners L.P. 2008 Omnibus Incentive Compensation Plan dated April
29, 2008 (5)
|
|
|
4.26
|
Agreement
between Capital Product Partners and Capital GP L.L.C. dated January 30,
2009 (6)
|
|
|
8.1
|
List
of Subsidiaries of Capital Product Partners L.P.
|
|
|
12.1
|
Rule
13a-14(a)/15d-14(a) Certification of Capital Product Partners L.P.’s Chief
Executive Officer
|
|
|
12.2
|
Rule
13a-14(a)/15d-14(a) Certification of Capital Product Partners L.P.’s Chief
Financial Officer
|
|
|
13.1
|
Capital
Product Partners L.P. Certification of Ioannis E. Lazaridis, Chief
Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
15.1
|
Consent
of Deloitte Hadjipavlou, Sofianos & Cambanis S.A.
|
|
|
(1)
|
Previously
filed as an exhibit to Capital Product Partners L.P.’s Registration
Statement on Form F-1 (File No. 333-141422), filed with the SEC on March
19, 2007 and hereby incorporated by reference to such Registration
Statement.
|
|
|
(2)
|
Previously
filed as Appendix A to the Partnership’s Rule 424(b)(4) Prospectus filed
with the SEC on March 30, 2007, and hereby incorporated by reference to
this Annual Report.
|
|
|
(3)
|
Previously
filed as an exhibit to the registrant’s Annual Report on Form 20-F for the
year ended December 31, 2007 and filed with the SEC on April 4,
2008.
|
|
|
(4)
|
Previously
filed as an exhibit to the registrant’s Registration Statement on Form F-3
filed with the SEC on August 29,
2008.
|
|
|
(5)
|
Previously
filed as a Current Report on Form 6-K with the SEC on April 30,
2008.
|
(6)
Previously filed as an exhibit to the registrant’s Annual Report on Form 20-F
for the year ended December 31, 2008 and filed with the SEC on March 27,
2009.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
CAPITAL
PRODUCT PARTNERS L.P.,
|
||
|
By:
|
Capital
GP L.L.C., its general partner
|
|
|
By:
|
/s/
Ioannis E. Lazaridis
|
|
|
Name:
|
Ioannis
E. Lazaridis
|
|
|
Title:
|
Chief
Executive Officer and Chief Financial Officer of Capital GP
L.L.C.
|
|
Dated: February
4, 2010
94
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Unitholders of Capital Product Partners L.P., Majuro, Republic of the Marshall
Islands
We have audited the accompanying
consolidated and combined balance sheets of Capital Product Partners L.P. (the
“Partnership”) as of December 31, 2009 and 2008, and the related consolidated
and combined statements of income, changes in partners’ capital/ stockholders’
equity, and cash flows for each of the three years in the period ended December
31, 2009. These financial statements are the responsibility of the
Partnership’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated and combined financial statements present fairly, in
all material respects, the financial position of Capital Product Partners L.P.
as of December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
As
discussed in Note 1 to the consolidated and combined financial statements, on
January 16, 2007, Capital Product Partners L.P. was formed for the purpose of
acquiring interests in eight wholly-owned subsidiaries of Capital Maritime &
Trading Corp. On April 4, 2007 the acquisition was completed and
Capital Product Partners L.P. began operating as a separate
company. Through April 4, 2007, the accompanying combined financial
statements have been prepared from the separate records maintained by Capital
Maritime & Trading Corp., and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the
Partnership had been operated as an unaffiliated entity.
Further,
as discussed in Note 1 to the consolidated and combined financial statements,
through September 24, 2007, March 27, 2008, April 30, 2008, April 7, 2009 and
April 13, 2009 the portion of the accompanying combined financial statements
attributable to Ross Shipmanagement Co., Baymont Enterprises Incorporated,
Forbes Maritime Co., Mango Finance Corp., and Navarro International S.A., prior
to the vessels’ acquisition by the Partnership , have been prepared from the
separate records maintained by Capital Maritime & Trading Corp. and may not
necessarily be indicative of the conditions that would have existed or the
results of operations if these entities had been operated as unaffiliated
entities.
Also as discussed in Note 1 to the
consolidated and combined financial statements, the financial statements give
retroactive effect to the April 7, 2009, acquisition by Capital Product Partners
L.P. of Mango Finance Corp., and the April 13, 2009, acquisition of Navarro
International S.A.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Partnership’s internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 4, 2010 expressed an
unqualified opinion on the Partnership’s internal control over financial
reporting.
/s/ Deloitte. Hadjipavlou, Sofianos,
& Cambanis S.A.
Athens,
Greece
February
4, 2010
F-1
Capital
Product Partners L.P.
Consolidated
and Combined Balance Sheets (Note 1)
(In
thousands of United States Dollars, except number of shares and
units)
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 3,552 | $ | 43,149 | ||||
|
Short
term investments (Note 2)
|
30,390 | 1,080 | ||||||
|
Trade
accounts receivable
|
213 | 6,421 | ||||||
|
Prepayments
and other assets
|
522 | 602 | ||||||
|
Inventories
|
111 | 94 | ||||||
|
Total
current assets
|
34,788 | 51,346 | ||||||
|
Fixed
assets
|
||||||||
|
Vessels,
net (Note 4)
|
638,723 | 718,153 | ||||||
|
Total
fixed assets
|
638,723 | 718,153 | ||||||
|
Other
non-current assets
|
||||||||
|
Deferred
charges, net
|
3,076 | 2,884 | ||||||
|
Restricted
cash (Notes 2, 5)
|
4,500 | 4,500 | ||||||
|
Total
non-current assets
|
646,299 | 725,537 | ||||||
|
Total
assets
|
$ | 681,087 | $ | 776,883 | ||||
|
Liabilities
and Partners’ Capital/ Stockholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
portion of long-term debt (Note 5)
|
$ | $ | ||||||
|
Current
portion of related-party long-term debt (Note 3)
|
24,538 | |||||||
|
Trade
accounts payable
|
296 | 475 | ||||||
|
Due
to related parties (Note 3)
|
4,939 | 2,256 | ||||||
|
Accrued
liabilities (Note 7)
|
2,273 | 1,149 | ||||||
|
Deferred
revenue – current
|
3,458 | 3,795 | ||||||
|
Total
current liabilities
|
10,966 | 32,213 | ||||||
|
Long-term
liabilities
|
||||||||
|
Long-term
debt (Note 5)
|
474,000 | 474,000 | ||||||
|
Long-term
related-party debt (Note 3)
|
27,762 | |||||||
|
Deferred
revenue – long-term
|
2,062 | 1,568 | ||||||
|
Derivative
instruments (Note 6)
|
36,931 | 47,414 | ||||||
|
Total
long-term liabilities
|
512,993 | 550,744 | ||||||
|
Total
liabilities
|
523,959 | 582,957 | ||||||
|
Commitments
and contingencies (Note 13)
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Common
stock (par value $0 and 1,000 shares issued and outstanding at December
31, 2008)
|
||||||||
|
Additional
paid in capital
|
21,295 | |||||||
|
Retained
earnings
|
456 | |||||||
|
Partners’
capital
|
||||||||
|
General
Partner
|
3,803 | 16,785 | ||||||
|
Limited
Partners - Common (24,817,151 and 16,011,629 units issued and outstanding
at December 31, 2009 and 2008, respectively)
|
186,493 | 122,811 | ||||||
|
Limited
Partners - Subordinated (0 and 8,805,522 units issued and outstanding at
December 31, 2009 and 2008, respectively)
|
76,230 | |||||||
|
Accumulated
other comprehensive loss (Notes 2, 6)
|
(33,168 | ) | (43,651 | ) | ||||
|
Total
partners’ capital/ stockholders’ equity
|
157,128 | 193,926 | ||||||
|
Total
liabilities and partners’ capital/ stockholders’ equity
|
$ | 681,087 | $ | 776,883 | ||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
F-2
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Income (Note 1)
(In
thousands of United States Dollars, except number of units and earnings per
unit)
|
For
the years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 123,477 | 132,675 | $ | 86,545 | |||||||
|
Expenses:
|
||||||||||||
|
Voyage
expenses (Note 8)
|
1,059 | 1,123 | 3,553 | |||||||||
|
Vessel
operating expenses - related party (Notes 3, 8)
|
30,095 | 25,653 | 12,688 | |||||||||
|
Vessel
operating expenses (Note 8)
|
499 | 3,803 | 6,287 | |||||||||
|
General
and administrative expenses
|
2,876 | 2,817 | 1,477 | |||||||||
|
Depreciation
and amortization (Note 4)
|
28,264 | 25,185 | 15,363 | |||||||||
|
Operating
income
|
60,684 | 74,094 | 47,177 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
expense and finance cost
|
(32,115 | ) | (25,602 | ) | (13,121 | ) | ||||||
|
Loss
on interest rate agreements
|
(3,763 | ) | ||||||||||
|
Interest
income
|
1,478 | 1,283 | 711 | |||||||||
|
Foreign
currency loss, net
|
(12 | ) | (56 | ) | (45 | ) | ||||||
|
Total
other expense, net
|
(30,649 | ) | (24,375 | ) | (16,218 | ) | ||||||
|
Net
income
|
30,035 | 49,719 | 30,959 | |||||||||
|
Less:
|
||||||||||||
|
Net
(loss) / income attributable to CMTC operations
|
810 | (1,048 | ) | 9,388 | ||||||||
|
Partnership’s
net income
|
$ | 29,225 | 50,767 | $ | 21,571 | |||||||
|
General
Partner’s interest in Partnership’s net income
|
$ | 584 | 13,485 | $ | 431 | |||||||
|
Limited
Partners’ interest in Partnership’s net income
|
$ | 28,641 | 37,282 | $ | 21,140 | |||||||
|
Net
income per:
|
||||||||||||
|
●
Common units (basic and diluted)
|
$ | 1.15 | 1.56 | $ | 1.11 | |||||||
|
●
Subordinated units (basic and diluted)
|
$ | 1.17 | 1.50 | $ | 0.70 | |||||||
|
● Total
units (basic and diluted)
|
$ | 1.15 | 1.54 | $ | 0.95 | |||||||
|
Weighted-average
units outstanding:
|
||||||||||||
|
●
Common units (basic and diluted)
|
23,755,663 | 15,379,212 | 13,512,500 | |||||||||
|
●
Subordinated units (basic and diluted)
|
1,061,488 | 8,805,522 | 8,805,522 | |||||||||
|
● Total
units (basic and diluted)
|
24,817,151 | 24,184,734 | 22,318,022 | |||||||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
F-3
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Changes in Partners’ Capital/ Stockholders’
Equity
(In
thousands of United States Dollars)
| Partners’ Capital | ||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stockholders’
Equity
|
General
Partner
|
Common
|
Subordinated
|
Total
|
Accumulated
Other Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||
|
Balance
at January 1, 2007
|
$ | 61,067 | $ | 61,067 | ||||||||||||||||||||||||||
|
Capital
contribution by CMTC (Note 11)
|
31,279 | 31,279 | ||||||||||||||||||||||||||||
|
Net
income attributable to CMTC
|
$ | 9,388 | 9,388 | 9,388 | ||||||||||||||||||||||||||
|
Equity
of contributed companies retained by CMTC (Note 11)
|
(4,340 | ) | (4,340 | ) | ||||||||||||||||||||||||||
|
Distribution
of Initial Vessels’ retained earnings as of April 3, 2007 to CMTC (Note
11)
|
(9,919 | ) | (9,919 | ) | ||||||||||||||||||||||||||
|
Issuance
of partnership units in exchange for common equity (Notes 1,
4)
|
(55,073 | ) | 5,471 | 162,214 | 105,863 | 273,548 | 218,475 | |||||||||||||||||||||||
|
Excess
of purchase price over acquired assets (Note 4)
|
(1,617 | ) | (47,954 | ) | (31,295 | ) | (80,866 | ) | (80,866 | ) | ||||||||||||||||||||
|
Dividend
paid to CMTC (Note 1)
|
(500 | ) | (14,825 | ) | (9,675 | ) | (25,000 | ) | (25,000 | ) | ||||||||||||||||||||
|
Dividends
declared and paid to unitholders (Note 11)
|
(341 | ) | (10,096 | ) | (6,589 | ) | (17,026 | ) | (17,026 | ) | ||||||||||||||||||||
|
Partnership
net income
|
21,571 | 431 | 15,000 | 6,140 | 21,571 | 21,571 | ||||||||||||||||||||||||
|
Other
comprehensive income/(loss):
|
||||||||||||||||||||||||||||||
|
● Unrealized
loss on derivative instruments (Notes 2, 6)
|
(10,288 | ) |
(10,288
|
) | (10,288 | ) | ||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 20,671 | ||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
$ | 32,402 | 3,444 | 104,339 | 64,444 | 172,227 |
(10,288
|
) | $ | 194,341 | ||||||||||||||||||||
F-4
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Changes in Partners’ Capital/ Stockholders’
Equity
(In
thousands of United States Dollars)
|
Partners’
Capital
|
||||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stockholders’
Equity
|
General
Partner
|
Common
|
Subordinated
|
Total
|
Accumulated
Other Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||||
|
Dividends
declared and paid to unitholders (Note 11)
|
(798 | ) | (24,871 | ) | (14,221 | ) | (39,890 | ) | $ | (39,890 | ) | |||||||||||||||||||||
|
Capital
contribution by CMTC (Note 11)
|
12,135 | 12,135 | ||||||||||||||||||||||||||||||
|
Net
loss attributable to CMTC
|
$ | (1,048 | ) | (1,048 | ) | (1,048 | ) | |||||||||||||||||||||||||
|
Equity
of contributed companies retained by CMTC (Note 11)
|
(21,738 | ) | (21,738 | ) | ||||||||||||||||||||||||||||
|
Issuance
of common units for vessels’ acquisitions (Notes 1, 4)
|
956 | 28,686 | 18,163 | 47,805 | 47,805 | |||||||||||||||||||||||||||
|
Excess
of purchase price over acquired assets (Note 4)
|
(302 | ) | (9,397 | ) | (5,384 | ) | (15,083 | ) | (15,083 | ) | ||||||||||||||||||||||
|
Partnership
net income
|
50,767 | 13,485 | 24,054 | 13,228 | 50,767 | 50,767 | ||||||||||||||||||||||||||
|
Other
comprehensive income/(loss):
|
||||||||||||||||||||||||||||||||
|
●
Unrealized loss on derivative instruments (Notes 2, 6)
|
(33,363 | ) | (33,363 | ) | (33,363 | ) | ||||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 16,356 | ||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
$ | 21,751 | 16,785 | 122,811 | 76,230 | 215,826 | (43,651 | ) | $ | 193,926 | ||||||||||||||||||||||
F-5
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Changes in Partners’ Capital/ Stockholders’
Equity
(In
thousands of United States Dollars)
| Partners’ Capital | ||||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stockholders’
Equity
|
General
Partner
|
Common
|
Subordinated
|
Total
|
Accumulated
Other Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||||
|
Dividends
declared and paid to unitholders (Note 11)
|
(13,880 | ) | (47,337 | ) | (9,246 | ) | (70,463 | ) | (70,463 | ) | ||||||||||||||||||||||
|
Capital
contribution by CMTC (Note 11)
|
40,570 | 40,570 | ||||||||||||||||||||||||||||||
|
Net
income attributable to CMTC
|
810 | 810 | 810 | |||||||||||||||||||||||||||||
|
Equity
of contributed companies retained by CMTC (Note 11)
|
(63,131 | ) | (63,131 | ) | ||||||||||||||||||||||||||||
|
Partnership
net income
|
29,225 | 584 | 27,399 | 1,242 | 29,225 | 29,225 | ||||||||||||||||||||||||||
|
Conversion
of subordinated units
|
68,226 | (68,226 | ) | |||||||||||||||||||||||||||||
|
Difference
of net book values of exchanged vessels net of cash consideration paid
(Note 4)
|
314 | 15,394 | 15,708 | 15,708 | ||||||||||||||||||||||||||||
|
Other
comprehensive income/(loss):
|
||||||||||||||||||||||||||||||||
|
● Unrealized
gain on derivative instruments (Notes 2, 6)
|
10,483 | 10,483 | 10,483 | |||||||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 40,518 | ||||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
$ | 3,803 | 186,493 | 190,296 | (33,168 | ) | $ | 157,128 | ||||||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
F-6
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Cash Flows (Note 1)
(In
thousands of United States Dollars)
|
For
the years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 30,035 | $ | 49,719 | $ | 30,959 | ||||||
|
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
||||||||||||
|
Vessel
depreciation and amortization
|
28,264 | 25,185 | 15,271 | |||||||||
|
Amortization
of deferred charges
|
442 | 395 | 214 | |||||||||
|
Loss
on interest rate swap agreement
|
3,763 | |||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Trade
accounts receivable
|
6,095 | (4,858 | ) | (3,841 | ) | |||||||
|
Due
from related parties
|
(11 | ) | (235 | ) | (4,842 | ) | ||||||
|
Prepayments
and other assets
|
11 | (545 | ) | (542 | ) | |||||||
|
Inventories
|
(289 | ) | 83 | (344 | ) | |||||||
|
Trade
accounts payable
|
494 | 1,068 | 1,787 | |||||||||
|
Due
to related parties
|
4,460 | 2,584 | 4,297 | |||||||||
|
Accrued
liabilities
|
420 | 799 | (690 | ) | ||||||||
|
Deferred
revenue
|
157 | 1,200 | 8,552 | |||||||||
|
Dry
docking expenses paid
|
- | (251 | ) | (921 | ) | |||||||
|
Net
cash provided by operating activities
|
70,078 | 75,144 | 53,663 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Vessel
acquisitions and new building advances (Note 4)
|
(26,460 | ) | (267,673 | ) | (332,446 | ) | ||||||
|
Additions
to restricted cash
|
(1,250 | ) | (3,250 | ) | ||||||||
|
Purchase
of short term investments
|
(111,850 | ) | (1,080 | ) | ||||||||
| Maturity of short term investments | 82,540 | |||||||||||
|
Net
cash used in investing activities
|
(55,770 | ) | (270,003 | ) | (335,696 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of long-term debt
|
199,500 | 305,050 | ||||||||||
|
Proceeds
from related-party debt
|
112,843 | 109,711 | ||||||||||
|
Payments
of long-term debt
|
(8,080 | ) | (16,716 | ) | ||||||||
|
Payments
of related-party debt
|
(23,309 | ) | (52,463 | ) | (2,376 | ) | ||||||
|
Loan
issuance costs
|
(703 | ) | (1,950 | ) | (1,092 | ) | ||||||
|
Payment
of offering expenses
|
(249 | ) | ||||||||||
|
Excess
of purchase price over book value of vessels acquired from entity under
common control (Note 4)
|
(3,755 | ) | (80,866 | ) | ||||||||
|
Dividends
paid
|
(70,463 | ) | (39,890 | ) | (42,026 | ) | ||||||
|
Cash
balance distributed to previous owner
|
(2 | ) | (2,251 | ) | ||||||||
|
Capital
contributions by CMTC
|
40,570 | 12,135 | 31,279 | |||||||||
|
Net
cash (used in) / provided by financing activities
|
(53,905 | ) | 218,089 | 300,713 | ||||||||
|
Net
(decrease) / increase in cash and cash
equivalents
|
(39,597 | ) | 23,230 | 18,680 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
43,149 | 19,919 | 1,239 | |||||||||
|
Cash
and cash equivalents at end of period
|
3,552 | 43,149 | $ | 19,919 | ||||||||
|
Supplemental
Cash Flow Information
|
||||||||||||
|
Cash
paid for interest
|
$ | 30,929 | $ | 24,264 | $ | 14,640 | ||||||
|
Non-Cash
Investing and Financing Activities
|
||||||||||||
|
Net
book value of vessels transferred-in, M/T Agamemnon II and M/T Ayrton II
less cash paid.
|
$ | 68,054 | ||||||||||
|
Net
book value of vessels transferred-out, M/T Assos and M/T
Atrotos
|
$ | (70,496 | ) | |||||||||
|
Net
liabilities assumed by CMTC upon contribution of vessels to the
Partnership (Note 10)
|
$ | 31,073 | $ | 74,239 | $ | 213,743 | ||||||
|
Units
issued to acquire vessel-owning company of M/T Amore Mio II (Note
4)
|
$ | 37,739 | ||||||||||
|
Units
issued to acquire vessel-owning company of M/T Aristofanis (Note
4)
|
$ | 10,066 | ||||||||||
|
Change
in accrued capitalized costs
|
$ | 870 | ||||||||||
|
Change
in payable offering expenses
|
$ | 49 | ||||||||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
F-7
|
1.
|
Basis
of Presentation and General
Information
|
Capital
Product Partners L.P. (the “Partnership” or “CPP”) was formed on January 16,
2007, under the laws of the Marshall Islands for the purpose of acquiring
interests in eight wholly owned subsidiaries of Capital Maritime & Trading
Corp. (“CMTC”), each of which owned, a double-hull medium-range product tanker
(the “Initial Vessels”).
The
Partnership is engaged in the seaborne transportation services of crude oil and
refined petroleum products, edible oils and soft chemicals, by chartering its
vessels under medium to long-term time and bareboat charters.
On April
3, 2007, the Initial Public Offering (the “IPO” or the “Offering”) of CPP on the
NASDAQ Global Market was completed successfully. In connection with the Offering
the Partnership entered into several new agreements including:
|
|
●
|
A
contribution agreement with CMTC, pursuant to which the Partnership
purchased all of the outstanding capital stock of the vessel-owning
companies of the Initial Vessels having net book value of $273,548 as of
April 3, 2007 (CMTC retained all assets of those subsidiaries other than
the vessels, and paid off all debt of those subsidiaries), in exchange
for:
|
|
|
a.
|
the
issuance to CMTC of 11,750,000 common units and 8,805,522 subordinated
units,
|
|
|
b.
|
the
payment to CMTC of a cash dividend in the amount of
$25,000,
|
|
|
c.
|
the
issuance to CMTC of the right to receive an additional dividend of $30,000
in cash or a number of common units necessary to satisfy the underwriters’
overallotment option or a combination thereof,
and
|
|
|
d.
|
the
issuance to the Partnership’s general partner, Capital GP L.L.C. (“CGP”),
a wholly owned subsidiary of CMTC, 419,500 general partner units
representing a 2% general partner interest in the Partnership and all of
incentive distribution rights which will entitle CGP to increasing
percentages of the cash that the Partnership will distribute in excess of
$0.4313 per unit per quarter.
|
|
|
●
|
An
omnibus agreement with CMTC, CGP and others governing, among other things,
the circumstances under which the Partnership and CMTC can compete with
each other and certain rights of first offer on medium range product
tankers;
|
|
|
●
|
A
management agreement with Capital Shipmanagement Corp. (the “Manager” or
“CSM”), a wholly owned subsidiary of CMTC, pursuant to which the Manager
agreed to provide commercial and technical management services to the
Partnership;
|
|
|
●
|
An
administrative services agreement with the Manager pursuant to which the
Manager agreed to provide administrative management services to the
Partnership; and
|
|
●
|
A
share purchase agreement with CMTC to purchase for a total consideration
of $368,000 its interests in seven wholly owned subsidiaries each of which
owns a newly built, double-hull medium-range product tanker (the
“Committed Vessels”). These vessels were acquired by the Partnership
between May 2007 and August 2008.
|
|
|
●
|
Revolving
credit facility of up to $370,000 and swapped the interest portion for
$366,500 in order to reduce the exposure of interest rates fluctuations
(Note 6).
|
On April
3, 2007, CMTC sold the 11,750,000 common units to the public through the
underwriters receiving $236,330. On the same date, the Partnership issued an
additional 1,762,500 common units to CMTC in order to fully satisfy the
underwriters’ overallotment option. CMTC received an additional amount of
$34,143 from the sale of these units. Following the exercise of the
over-allotment option, the Partnership issued an additional 35,970 general
partner units to CGP in order to maintain its 2% interest in the Partnership.
The total proceeds of the Offering were used by CMTC to repay $213,843 of
existing debt of the Initial Vessels and the Offering expenses. In connection
with the completion of the Offering the Partnership also borrowed $30,000 under
the revolving credit facility, $5,000 of which was used for working capital
purposes and $25,000 of which was used to pay a cash dividend to CMTC. Following
the completion of the Offering, CMTC owned 8,805,522 subordinated units
representing a 40.7% interest in the Partnership, including a 2% interest
through its ownership of CGP.
On
September 24, 2007, the Partnership remitted to CMTC the amount of $23,000 in
exchange for the acquisition of the shares of the vessel-owning company of the
M/T Attikos, a 12,000 DWT, 2005-built double hull product tanker. M/T Attikos
was neither an Initial nor a Committed Vessel.
F-8
|
1.
|
Basis
of Presentation and General Information –
Continued
|
On March
27, 2008, the Partnership entered into a share purchase agreement with CMTC for
the acquisition of the shares of the vessel-owning company of the M/T Amore Mio
II, a 159,982 dwt, 2001 built, double hull tanker from CMTC and took delivery of
the vessel on the same date. The total purchase price for the shares of the
vessel-owning company of the M/T Amore Mio II was $85,739. The acquisition of
the shares of the vessel-owning company was funded by $2,000 from available
cash, $46,000 through a draw down from the new revolving $350,000 credit
facility, and the remaining amount through the issuance of 2,048,823 common
units to CMTC at a price of $18.42 per unit as quoted on the Nasdaq Stock
Exchange on March 26, 2008, the day prior to the acquisition. M/T Amore Mio II
was neither an Initial nor a Committed Vessel.
On March
31, 2008, CMTC made a capital contribution of 40,976 common units to the
Partnership in exchange for the issuance of the same number of general partner
units to CGP in order for it to maintain its 2% general partner interest in the
Partnership.
On April
30, 2008, the Partnership entered into a share purchase agreement with CMTC for
the acquisition of the shares of the vessel-owning company of the M/T
Aristofanis, a 12,000 dwt, 2005 built, double hull tanker from CMTC and took
delivery of the vessel on the same date. The total purchase price for the shares
of the vessel-owning company of the M/T Aristofanis was $21,566. The acquisition
of the shares of the vessel-owning company was funded by $11,500 through a draw
down from the new revolving $350,000 credit facility, and the remaining amount
through the issuance of 501,308 common units to CMTC at a price of $20.08 per
unit as quoted on the Nasdaq Stock Exchange on April 29, 2008, the day prior to
the acquisition. M/T Aristofanis was neither an Initial nor a Committed
Vessel.
On April
30, 2008, CMTC made a capital contribution of 10,026 common units to the
Partnership in exchange for the issuance of the same number of general partner
units to CGP in order for it to maintain its 2% general partner interest in the
Partnership.
Following
the issuance of the additional common units relating to the acquisition of the
M/T Amore Mio II and the M/T Aristofanis and the capital contribution from CMTC
to the Partnership in order for CGP to maintain its 2% general partner interest
in the Partnership, third parties owned 13,512,500 common units, CMTC owned
2,499,129 common units and 8,805,522 subordinated units together representing a
44.6% limited partner interest in the Partnership. In addition, CGP owned a 2%
general partner interest in the Partnership and all of the incentive
distribution rights.
On
January 30, 2009, the Partnership’s board of directors declared a cash
distribution of $1.05 per unit, which resulted in a distribution of $12,724 with
respect to incentive distribution rights held by CGP, in accordance with the
terms of the partnership agreement. The payment of this distribution brought
annual distributions to unitholders to $2.27 per unit for the year ended
December 31, 2008, a level which under the terms of the partnership agreement
resulted in the early termination of the subordination period and the conversion
of the subordinated units into common units on a one-to-one basis. Following the
conversion of subordinated units into common units, CMTC owned a 46.6% interest
in the Partnership, including 11,304,651common units and a 2% interest in us
through its ownership of our general partner.
On April
7, 2009, CMTC and CPP signed a Share Purchase Agreement under which CMTC sold to
CPP the shares of the vessel-owning company of the M/T Agamemnon II, a 51,238
dwt chemical/product tanker built in 2008. The M/T Agamemnon II has been
chartered to BP Shipping Limited under a time charter expiring in December 2011.
All assets and liabilities of the vessel-owning company of the M/T Agamemnon II,
except the vessel, necessary permits and time charter agreement, were retained
by CMTC. In exchange, CMTC received all the shares of the
vessel-owning company of M/T Assos, which was part of the Initial Vessels and an
additional cash consideration of $4,000. All assets and liabilities of the
vessel-owning company of M/T Assos, except the vessel and necessary permits were
retained by CPP. M/T Agamemnon II was neither an Initial nor a Committed
Vessel.
F-9
|
1.
|
Basis
of Presentation and General Information –
Continued
|
On April
13, 2009, CMTC and CPP signed a Share Purchase Agreement under which CMTC sold
to CPP all the shares of the vessel-owning company of M/T Ayrton II a 51,260 dwt
chemical/product tanker, built in 2009. The M/T Ayrton II has been chartered to
BP Shipping Limited under a time charter expiring in March 2011. All assets and
liabilities of the vessel-owning company of M/T Ayrton II, except the vessel,
necessary permits and time charter agreement, were retained by
CMTC. In exchange, CMTC received all the shares of the vessel-owning
company of M/T Atrotos, which was part of the Committed Vessels and an
additional cash consideration of $4,000. All assets and liabilities of the
vessel-owning company of M/T Atrotos, except the vessel and necessary permits
were retained by CPP. M/T Ayrton II was neither an Initial nor a
Committed Vessel.
Following
the exchange of the vessel-owning companies of the M/T Assos and the M/T Atrotos
by the vessel-owning companies of the M/T Agamemnon II and the M/T Ayrton II,
the major terms of the Partnership’s credit facilities and interest rate swap
agreements, except for the substitutions of guarantors, remained
unchanged.
The
Initial Vessels were recorded by the Partnership at historical cost at the date
of transfer and were accounted for as a combination of entities under common
control. All assets, liabilities and equity other than the relevant
vessel, related charter agreement and related permits of these vessels’
ship-owning companies were retained by CMTC.
The
Partnership accounted for the acquisition of the vessel-owning company of the
M/T Attikos, the M/T Amore Mio II the M/T Aristofanis, the M/T Agamemnon II and
the M/T Ayrton II (together, the “Non-Contracted Vessels”) as a transfer of
equity interest between entities under common control. For a combination between
entities under common control, the purchase cost provisions (as they relate to
purchase business combinations involving unrelated entities) explicitly do not
apply; instead the method of accounting prescribed by accounting standards for
such transfers is similar to pooling-of-interests method of accounting. Under
this method, the carrying amount of assets and liabilities recognized in the
balance sheets of each combining entity are carried forward to the balance sheet
of the combined entity, and no other assets or liabilities are recognized as a
result of the combination. No recognition is made for a purchase premium or
discount representing any difference between the cash consideration paid and the
book value of the net assets acquired.
Following
the acquisition of the vessel-owning companies of the Non-Contracted Vessels
from CMTC, the Partnership recognized the vessels acquired at their carrying
amounts (historical cost) in the accounts of CMTC (the transferring entity) at
the date of transfer. In addition, transfers of equity interest between entities
under common control are accounted for as if the transfer occurred at the
beginning of the period, and prior years are retroactively adjusted to furnish
comparative information similar to the pooling method. The amount of the
purchase price in excess of CMTC’s basis in the net assets is recognized as a
reduction to partners’ capital. In the case of the acquisition of the shares of
the vessel owning companies of the M/T Agamemnon II and the M/T Ayrton II the
carrying amount of these two vessels in CMTC’s financial statements was in
excess of the net book value of the M/T Atrotos and the M/T Assos, net of
cash consideration paid therefore. This difference was recognized as
an increase to the partner’s capital.
The
Committed Vessels were delivered to CMTC from the shipyards (unrelated parties)
and on the same date the Partnership acquired the shares of the vessel-owning
companies. These vessel-owning companies did not have an operating history, as
such, there is no information to retroactively restate that should be
considered. Accordingly the Committed Vessels (M/T Atrotos, M/T Akeraios, M/T
Apostolos, M/T Anemos I, M/T Alexandros II, M/T Aristotelis II, and M/T Aris II)
were transferred to the Partnership at historical cost of CMTC at the date of
transfer. All assets, other than the vessels, liabilities and equity that the
vessel-owning companies of the Committed Vessels had at the time of the transfer
were retained by CMTC.
The
vessel-owning companies of the M/T Assos and the M/T Atrotos were deconsolidated
from the Partnership accounts as of the date of the transfer to
CMTC. Results of operations, cash flows, and balances of these
vessels prior to their transfer to CMTC are included in the Partnership’s
consolidated and combined financial statements.
Combined
information presented in these financial statements reflects the historical
carrying costs, operations and cash flows of the contributed companies, as each
vessel-owning company was under the common control of CMTC. These financial
statements are collectively referred to as “combined” financial statements.
Financial statements presented reflecting the Partnership’s balance sheets,
results of operations and cash flows are referred to as “consolidated” financial
statements.
F-10
|
1.
|
Basis
of Presentation and General Information –
Continued
|
The
consolidated and combined financial statements include the following
vessel-owning companies and management company which were all incorporated or
formed under the laws of the Marshall Islands.
|
Subsidiary
|
Date
of
Incorporation
|
Name
of Vessel
Owned
by
Subsidiary
|
DWT
|
Date
acquired
by
the Partnership
|
Date
acquired
by
CMTC
|
||||||
|
Capital
Product Operating GP LLC
|
01/16/2007
|
||||||||||
|
Shipping
Rider Co.
|
09/16/2003
|
M/T
Atlantas (1)
|
36,760 |
04/04/2007
|
04/26/2006
|
||||||
|
Canvey
Shipmanagement Co.
|
03/18/2004
|
M/T
Assos (1), (4)
|
47,872 |
04/04/2007
|
05/17/2006
|
||||||
|
Centurion
Navigation Limited
|
08/27/2003
|
M/T
Aktoras (1)
|
36,759 |
04/04/2007
|
07/12/2006
|
||||||
|
Polarwind
Maritime S.A.
|
10/10/2003
|
M/T
Agisilaos (1)
|
36,760 |
04/04/2007
|
08/16/2006
|
||||||
|
Carnation
Shipping Company
|
11/10/2003
|
M/T
Arionas (1)
|
36,725 |
04/04/2007
|
11/02/2006
|
||||||
|
Apollonas
Shipping Company
|
02/10/2004
|
M/T
Avax (1)
|
47,834 |
04/04/2007
|
01/12/2007
|
||||||
|
Tempest
Maritime Inc.
|
09/12/2003
|
M/T
Aiolos (1)
|
36,725 |
04/04/2007
|
03/02/2007
|
||||||
|
Iraklitos
Shipping Company
|
02/10/2004
|
M/T
Axios (1)
|
47,872 |
04/04/2007
|
02/28/2007
|
||||||
|
Epicurus
Shipping Company
|
02/11/2004
|
M/T Atrotos
(2), (5)
|
47,786 |
05/08/2007
|
05/08/2007
|
||||||
|
Laredo
Maritime Inc.
|
02/03/2004
|
M/T
Akeraios (2)
|
47,781 |
07/13/2007
|
07/13/2007
|
||||||
|
Lorenzo
Shipmanagement Inc.
|
05/26/2004
|
M/T
Apostolos (2)
|
47,782 |
09/20/2007
|
09/20/2007
|
||||||
|
Splendor
Shipholding S.A.
|
07/08/2004
|
M/T
Anemos I (2)
|
47,782 |
09/28/2007
|
09/28/2007
|
||||||
|
Ross
Shipmanagement Co.
|
12/29/2003
|
M/T
Attikos (3)
|
12,000 |
09/24/2007
|
01/20/2005
|
||||||
|
Sorrel
Shipmanagement Inc.
|
02/07/2006
|
M/T
Alexandros II (M/T Overseas Serifos) (2)
|
51,258 |
01/29/2008
|
01/29/2008
|
||||||
|
Baymont
Enterprises Incorporated
|
05/29/2007
|
M/T
Amore Mio II (3)
|
159,982 |
03/27/2008
|
07/31/2007
|
||||||
|
Forbes
Maritime Co.
|
02/03/2004
|
M/T
Aristofanis (3)
|
12,000 |
04/30/2008
|
06/02/2005
|
||||||
|
Wind
Dancer Shipping Inc.
|
02/07/2006
|
M/T
Aristotelis II (M/T Overseas Sifnos) (2)
|
51,226 |
06/17/2008
|
06/17/2008
|
||||||
|
Belerion
Maritime Co.
|
01/24/2006
|
M/T
Aris II (M/T Overseas Kimolos) (2)
|
51,218 |
08/20/2008
|
08/20/2008
|
||||||
|
Mango
Finance Corp.
|
07/14/2006
|
M/T
Agamemnon II (3), (4)
|
51,238 |
04/07/2009
|
11/24/2008
|
||||||
|
Navarro
International S.A.
|
07/14/2006
|
M/T
Ayrton II (3), (5)
|
51,238 |
04/13/2009
|
04/10/2009
|
||||||
(1)
Initial Vessels
(2)
Committed Vessels
(3)
Non-Contracted Vessels
(4) On
April 7, 2009 the M/T Assos was exchanged with the M/T Agamemnon II
(5) On
April 13, 2009 the M/T Atrotos was exchanged with the M/T Ayrton II
F-11
|
2.
|
Significant
Accounting Policies
|
|
(a)
|
Principles
of Consolidation and Combination: The accompanying consolidated and
combined financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“U.S. GAAP”), after giving retroactive effect to the combination of
entities under common control in 2007, 2008 and 2009, as described in Note
1 to the consolidated and combined financial statements, and include the
accounts of the legal entities comprising the Partnership as discussed in
Note 1. Intra-group balances and transactions have been eliminated upon
consolidation. Balances and transactions with CMTC and its affiliates have
not been eliminated, but are presented as balances and transactions with
related parties.
|
|
(b)
|
Use of
Estimates: The preparation of consolidated and combined financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the amounts of revenues and expenses
recognized during the reporting period. Actual results could differ from
those estimates. Additionally, these consolidated financial statements
include allocations for certain expenses, including corporate overhead
expenses that are normally incurred by a listed
company.
|
|
(c)
|
Other
Comprehensive Income (Loss): The Partnership separately records
certain transactions directly as components of partners’ capital /
stockholders’ equity. For the years ended December 31, 2009, 2008 and 2007
other comprehensive income/(loss) amounted to $10,483, ($33,363) and
($10,288), respectively., and is solely comprised of changes is interest
rate swaps that qualify as cash flow hedges (Note 6). As of December 31,
2009, 2008 and 2007 the Partnership had Accumulated Other Comprehensive
Loss of $33,168, $43,651 and $10,288,
respectively.
|
|
(d)
|
Accounting
for Revenue, Voyage and Operating Expenses: The Partnership
generates its revenues from charterers for the charter hire of its
vessels. Vessels are chartered using either time charters or bareboat
charters. A time charter is a contract for the use of a vessel
for a specific period of time and a specified daily charter hire rate,
which is generally payable monthly in advance. Some of the Partnership’s
time charters also include profit sharing provisions, under which the
Partnership can realize additional revenues in the event that spot rates
are higher than the base rates in these time charters. A bareboat charter
is a contract in which the vessel owner provides the vessel to the
charterer for a fixed period of time at a specified daily rate, which is
generally payable monthly in advance, and the customer generally assumes
all risk and costs of operation during the lease term. We may in the
future employ some of our vessels on voyage charters. Revenues under
voyage charter agreements are recognized when a voyage agreement exists,
the price is fixed, service is provided and the collection of the related
revenue is reasonably assured, revenues are recorded over the term of the
charter as service is provided and recognized on a pro-rata basis over the
duration of the voyage. A voyage is deemed to commence upon the later of
the completion of discharge of the vessel’s previous cargo or upon vessel
arrival to the agreed upon port based on the terms of a voyage contract
that is not cancelable and voyage is deemed to end upon the completion of
discharge of the delivered cargo.
|
All of
the Partnership’s time charters and bareboat charters are classified as
operating leases. Revenues under operating lease arrangements are recognized
when a charter agreement exists, charter rate is fixed and determinable, the
vessel is made available to the lessee, and collection of the related revenue is
reasonably assured. Revenues are recognized ratably on a straight line basis
over the period of the respective time or bareboat charter. Revenues from profit
sharing arrangements in time charters represent 50% portion of time charter
equivalent (voyage income less direct expenses, divided by operating days), that
exceeds the agreed base rate and are recognized in the period earned. Deferred
revenue represents cash received in advance of being earned. The portion of the
deferred revenue that will be earned within the next twelve months is classified
as current liability and the rest as long term liability.
Vessel
voyage expenses are direct expenses to voyage revenues and primarily consist of
commissions, port expenses, canal dues and bunkers. Commissions are expensed
over the related charter period and all the other voyage expenses are expensed
as incurred. Under the Partnership’s time and bareboat charter agreements, all
voyages expenses, except commissions for which we are liable, are assumed by the
charterer. With the exception of our Morgan Stanley Capital Group Inc. time
charter agreements and Overseas Shipholding Group Inc. bareboat charter
agreements where the charterer is responsible for the commissions.
Vessel
operating expenses presented in the consolidated financial statements consist of
management fees payable to the Manager. The Manager provides commercial and
technical services such as crewing, repairs and maintenance, insurance, stores,
spares, and lubricants through a management agreement for a fixed daily fee of
$5.5 per vessel for the time chartered vessels, except for the M/T Amore Mio II,
M/T Agamemnon II and M/T Ayrton II for which the daily fixed fee is $8.5, $6.5
and $6.5, respectively. The fee also includes expenses related to the next
scheduled special or intermediate survey as applicable and related dry-docking
for each vessel.
F-12
|
2.
|
Significant
Accounting Policies – Continued
|
|
(d)
|
Accounting
for Revenue, Voyage and Operating Expenses –
Continued:
|
Furthermore,
pursuant to the management agreement, the Manager may charge the Partnership for
additional costs such as insurance deductibles, vetting, and repairs and spares
that relate to unforeseen events. For bareboat chartered vessels, the bareboat
charterer is responsible for vessel operating expenses such as crewing, repairs
and maintenance, insurance, stores, spares, and lubricants, and the Partnership
pays a fixed daily fee of $0.3 to the Manager for expenses mainly to cover
compliance costs.
Vessel
operating expenses presented in the combined financial statements consist of all
expenses relating to the operation of the vessels including crewing, repairs and
maintenance, insurances, stores and lubricants, management fees and
miscellaneous expenses. Vessel operating expenses are expensed as
incurred.
|
(e)
|
Foreign
Currency Transactions: The functional currency of the Partnership
is the U.S. Dollar because the Partnership’s vessels operate in
international shipping markets that utilize the U.S. Dollar as the
functional currency. The accounting records of the Partnership are
maintained in U.S. Dollars. Transactions involving other
currencies during the year are converted into U.S. Dollars using the
exchange rates in effect at the time of the transactions. At
the balance sheet dates, monetary assets and liabilities, which are
denominated in currencies other than the U.S. Dollar, are translated into
the functional currency using the exchange rate at that
date. Gains or losses resulting from foreign currency
transactions and translations are included in Foreign currency loss, net
in the accompanying consolidated and combined statements of
income.
|
|
(f)
|
Cash and
Cash Equivalents: The Partnership considers highly-liquid
investments such as time deposits and certificates of deposit with an
original maturity of three months or less to be cash
equivalents.
|
|
(g)
|
Short-term
investments: Short-term investments consist of cash time deposits
with original maturity of three to twelve months and amounted to $30,390
and $1,080 as of December 31, 2009 and 2008,
respectively.
|
|
(h)
|
Restricted
cash: For the Partnership to comply with debt covenants under its
credit facility, it must maintain minimum cash deposits. Such deposits are
considered by the Partnership to be restricted cash. As of December 31,
2009 and 2008, restricted cash amounted to $4,500 and is presented under
other non-current assets.
|
|
(i)
|
Trade
Accounts Receivable: The amount shown as trade accounts receivable
primarily consists of profit share earned but not yet collected. At each
balance sheet date all potentially uncollectible accounts are assessed
individually for purposes of determining the appropriate provision for
doubtful accounts. No allowance for doubtful accounts was established as
of December 31, 2009 and 2008.
|
|
|
(j)
|
Inventories:
Inventories consist of consumable bunkers, lubricants, spares and stores
and are stated at the lower of cost or market value. The cost is
determined by the first-in, first-out
method.
|
|
(k)
|
Fixed
Assets: Fixed assets consist of vessels which are stated at cost,
less accumulated depreciation. Vessel cost consists of the
contract price for the vessel and any material expenses incurred upon
their construction (improvements and delivery expenses, on-site
supervision costs incurred during the construction periods, as well as
capitalized interest expense during the construction period). The cost of
each of the Partnership’s vessels is depreciated beginning when the vessel
is ready for its intended use, on a straight-line basis over the vessels’
remaining economic useful life, after considering the estimated residual
value. Management estimates the useful life to be 25
years.
|
F-13
|
2.
|
Significant
Accounting Policies – Continued
|
|
(l)
|
Impairment
of Long-lived Assets: An impairment loss on long-lived assets is
recognized when indicators of impairment are present and the carrying
amount of the long-lived asset is less than its fair value and not
believed to be recoverable. In determining future benefits derived from
use of long-lived assets, the Partnership performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived
assets. If the carrying value of the related asset exceeds its
undiscounted future net cash flows, the carrying value is reduced to its
fair value, less costs to sell. Various factors including future charter
rates and vessel operating costs are included in this
analysis.
|
The
Partnership did not note for the year ended December 31, 2008 and for the period
from April 4, 2007 to December 31, 2007, any events or changes in circumstances
indicating that the carrying amount of its vessels may not be recoverable.
However, in the year ended December 31, 2009, market conditions changed
significantly as a result of the credit crisis and resulting slowdown in world
trade. Charter rates for tanker vessels decreased and values of assets were
affected although there were limited transactions to confirm the decrease in
vessel values. The Partnership considered these market developments as
indicators of potential impairment of the carrying amount of its assets. The
Partnership performed an undiscounted cash flow test as of December 31, 2009,
determining undiscounted projected net operating cash flows for the vessels and
comparing them to the vessels’ carrying values. In developing estimates of
future cash flows, the Partnership made assumptions about future charter rates,
utilization rates, vessel operating expenses, future dry docking costs and
the estimated remaining useful life of the vessels. These assumptions are based
on historical trends as well as future expectations that are in line with the
Partnership’s historical performance and expectations for the vessels’
utilization under the deployment strategy. Based on these assumptions, the
Partnership determined that the undiscounted cash flows supported the vessels’
carrying amounts as of December 31, 2009.
|
(m)
|
Deferred
Charges: Deferred charges are comprised mainly of fees paid to
lenders for obtaining new loans or refinancing existing loans and are
capitalized as deferred finance charges and amortized to interest expense
over the term of the respective loan using the effective interest rate
method.
|
|
(n)
|
Pension and
Retirement Benefit Obligations: The vessel-owning companies
included in the consolidated and combined financial statements employ the
crew on board under short-term contracts (usually up to seven months) and
accordingly, they are not liable for any pension or post retirement
benefits.
|
|
(o)
|
Concentration
of Credit Risk: Financial instruments which potentially subject the
Partnership to significant concentrations of credit risk consist
principally of cash and cash equivalents, interest rate swaps, and trade
accounts receivable. The Partnership places its cash and cash equivalents,
consisting mostly of deposits, and enters into interest rate swap
agreements with creditworthy financial institutions as rated by qualified
rating agencies. Most of the Partnership’s revenues were derived from a
few charterers. For the year ended December 31, 2009, British Petroleum
Shipping Limited, Morgan Stanley Capital Group Inc., and OSG accounted for
59%, 22% and 12% of the Partnership’s total revenue, respectively. For the
year ended December 31, 2008 British Petroleum Shipping Limited and Morgan
Stanley Capital Group Inc., accounted for 54% and 33% of total revenue,
respectively. For the year ended December 31, 2007, British Petroleum
Shipping Limited and Morgan Stanley Capital Group Inc. accounted for 58%
and 24% of total revenue, respectively. The Partnership does not obtain
rights of collateral from its charterers to reduce its credit
risk.
|
|
(p)
|
Fair Value
of Financial Instruments: On January 1,
2008, the Partnership adopted the accounting guidance for Fair Value
Measurements for financial assets and liabilities and any other assets and
liabilities carried at fair value. This guidance defines fair value,
establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Partnership’s adoption of this
accounting guidance did not have a material effect on the Partnership’s
Consolidated and Combined Financial Statements for financial assets and
liabilities and any other assets and liabilities carried at fair value.
The carrying value of trade receivables, accounts payable and current
accrued liabilities approximates their fair value. The fair values of
long-term variable rate bank loans approximate the recorded values, due to
their variable interest and due to the fact that we have recently amended
a financial covenant for our loans and the lenders have increased the
margin over LIBOR that we pay to reflect their current risk. We believe
the terms of our loans are similar to those that could be procured as of
December 31, 2009. Interest rate swaps are recorded at fair value on the
consolidated and combined balance
sheet.
|
|
(q)
|
Interest
Rate Swap Agreements: The Partnership designates its
derivatives based upon the intended use, and recognizes all derivatives as
either assets or liabilities in the statement of financial position and
measures those instruments at fair value. Changes in the fair
value of each derivative instrument are recorded depending on the intended
use of the derivative and the resulting designation. For a
derivative that does not qualify as a hedge, changes in fair value are
recognized within the income statement. For derivatives that
qualify as cash flow hedges, the changes in fair value of the effective
portion are recognized at the end of each reporting period in Other
comprehensive income / (loss), until the hedged item is recognized in
income. The ineffective portion of a derivative’s change in fair value is
immediately recognized in the income
statement.
|
F-14
|
2.
|
Significant
Accounting Policies – Continued
|
|
(r)
|
Net Income
(Loss) Per Limited Partner Unit: Basic and diluted net income per
limited partner unit is calculated by dividing Partnership’s net income
less general partner interest in net income (including incentive
distribution rights) by the weighted-average number of outstanding limited
partner units during the period (Note 12). Diluted net income per limited
partner unit reflects the potential dilution that could occur if
securities or other contracts to issue limited partner units were
exercised. The Partnership had no dilutive securities outstanding during
the years ended December 31, 2009, 2008 and
2007.
|
|
(s)
|
Income
Taxes: The Partnership is
not subject to the payment of any income tax on its income. Instead, a tax
is levied based on the tonnage of the vessels, which is included in
operating expenses (Note 9).
|
|
(t)
|
Segment
Reporting: The Partnership
reports financial information and evaluates its operations by charter
revenues and not by the length or type of ship employment for its
customers, i.e. time or bareboat charters. The Partnership does not use
discrete financial information to evaluate the operating results for each
such type of charter. Although revenue can be identified for these types
of charters, management cannot and does not identify expenses,
profitability or other financial information for these charters. As a
result, management, including the chief operating decision maker, reviews
operating results solely by revenue per day and operating results of the
fleet, and thus the Partnership has determined that it operates under one
reportable segment. Furthermore, when
the Partnership charters a vessel to a charterer, the charterer is free to
trade the vessel worldwide and, as a result, the disclosure of geographic
information is impracticable.
|
|
(u)
|
Recent
Accounting Pronouncements:
|
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued new
guidance on Business Combinations. This new accounting guidance establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired. The
Statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This Statement applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. An entity may not apply it before that date. The Partnership adopted
this guidance as of January 1, 2009. Adoption of this guidance did not have any
effect on the Partnerships financial statements.
In
December 2007, the FASB issued new guidance that establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance is effective for periods beginning
after December 15, 2008. The Partnership adopted this guidance as of January 1,
2009. Adoption of this guidance did not have any effect on the Partnerships
financial statements.
In
February 2008, the FASB issued the FASB new guidance which delays the
effective date of fair value measurement guidance, for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
For purposes of applying this guidance, nonfinancial assets and nonfinancial
liabilities would include all assets and liabilities other than those meeting
the definition of a financial asset or financial liability as defined in
guidance, “The Fair Value Option for Financial Assets and Financial
Liabilities.” This guidance defers the effective date of fair value measurement
guidance to fiscal years beginning after November 15, 2008, and the interim
periods within those fiscal years for items within the scope of this guidance.
The Partnership didn’t make any fair value options under this
guidance.
F-15
|
2.
|
Significant
Accounting Policies – Continued
|
|
(u)
|
Recent Accounting
Pronouncements – Continued:
|
In
October 2008, the FASB issued new guidance which clarifies the application
of, Fair Value Measurements in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that asset is not active. This guidance
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with fair value
measurements. This guidance shall be effective upon issuance, including prior
periods for which financial statements have not been issued. Revisions resulting
from a change in the valuation technique or its application shall be accounted
for as a change in accounting estimate. The disclosure provisions of a change in
accounting estimate are not required for revisions resulting from a change in
valuation technique or its application. Partnership didn’t make any fair value
options under this guidance.
In March
2008, the FASB issued new guidance for disclosures about derivative instruments
and hedging activities.This new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Partnership adopted this standard as of January 1, 2009. All disclosures
required by this guidance have been made in Note 6 of these financial
statements.
In March
2008, the FASB issued new guidance for the application of the two-class method
under, Earnings per Share, to Master Limited Partnerships. This accounting
guidance considers whether the incentive distributions of a master limited
partnership represent a participating security when considered in the
calculation of earnings per unit under the two-class method. This guidance also
considers whether the partnership agreement contains any contractual limitations
concerning distributions to the incentive distribution rights that would impact
the amount of earnings to allocate to the incentive distribution rights for each
reporting period. If distributions are contractually limited to the incentive
distribution rights’ share of currently designated available cash for
distributions as defined under the partnership agreement, undistributed earnings
in excess of available cash should not be allocated to the incentive
distribution rights. Any excess distributions over earnings shall be allocated
to the GP and LPs based on their respective sharing of losses specified in the
Partnership agreement for the period presented. This guidance is effective for
fiscal years beginning after December 15, 2008, including interim periods
within those fiscal years, and requires retrospective application of the
guidance to all periods presented. Early adoption is prohibited. The Partnership
is adopted the provisions of this guidance on January 1, 2009 and
retrospectively applied the provisions to all periods presented. Due to the
retrospective application of this guidance Earning per Unit for the year ended
December 31, 2008 decreased from $2.00 (as previously reported) to $1.54. For
the period from April 4, 2007 (inception) to December 31, 2007 the application
of this guidance did not affect previously reported Earnings per
Unit.
In
October 2008, the FASB issued guidance regarding subsequent events. This
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. In particular, this guidance sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This guidance is effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009, and the adoption did not have a material impact on the Partnership’s
financial statements.
On June
29, 2009, the FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles and became the single source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. The Codification’s content will carry the same level of authority,
effectively superseding previous guidance. In other words, the GAAP hierarchy
will be modified to include only two levels of GAAP: authoritative and
non-authoritative. This new guidance is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Partnership adopted the new guidance in the fourth quarter of 2009 and updated
references to US GAAP in these consolidated financial statements to reflect the
guidance in the Codification.
F-16
In
December 2009, the FASB issued Accounting Standards Update on consolidations to
improve financial reporting by enterprises involved with variable interest
entities. This new guidance revises previously issued guidance on consolidation
of variable interest entities, and changes how a reporting entity determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The determination of whether
a reporting entity is required to consolidate another entity is based on, among
other things, the other entity’s purpose and design and the reporting entity’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance. This guidance also
requires a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity’s financial statements. This guidance is effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009, or the Company’s fiscal year beginning October 1, 2010. Early
application is not permitted. We do not expect that the adoption of this
guidance will have a material impact, if any, on the Partnership’s financial
statements.
F-17
|
3.
|
Transactions
with Related Parties
|
Since
April 4, 2007, the Partnership and its subsidiaries, have had related-party
transactions with the Manager, a wholly-owned subsidiary of CMTC, which provides
management services to the Partnership for a total daily fixed fee of $5.5,
except for the M/T Amore Mio II, MT Agamemnon II and M/T Ayrton II for which the
daily fixed fee is $8.5, $6.5, and $6.5, respectively, and $0.3 for each time
and bare boat chartered vessel. The daily fixed fee for the time chartered
vessels also includes expenses related to the next scheduled special or
intermediate survey as applicable and related dry docking for each vessel. Total
management fees charged by the Manager in relation to the above management
agreement for the years ended December 31, 2009, 2008, and for the period from
April 4, 2007 to December 31, 2007, were $26,265, $24,305 and $11,573,
respectively, and are included in “Vessel operating expenses – related party” in
the consolidated income statements.
According
to the terms of the management agreement, the Manager charged the Partnership
for additional fees and costs, as defined in the management agreement, relating
to insurances deductibles, vetting, and repairs and spares that related to
unforeseen events, totaling $2,963, $1,002, and $0 for the years ended December
31, 2009, 2008, and for the period from April 4, 2007 to December 31, 2007,
respectively.
On April
4, 2007, the Partnership entered into an administrative services agreement with
the Manager, pursuant to which the Manager will provide certain administrative
management services to the Partnership such as accounting, auditing, legal,
insurance, IT, clerical, investor relations and other administrative services.
Also the Partnership reimburses CGP for all expenses which are necessary or
appropriate for the conduct of the Partnership’s business. The Partnership
reimburses the Manager and CGP for reasonable costs and expenses incurred in
connection with the provision of these services after the Manager submits to the
Partnership an invoice for such costs and expenses, together with any supporting
detail that may be reasonably required. For the years ended December 31, 2009,
2008, and for the period from April 4, 2007 to December 31, 2007, the Manager
and CGP invoiced the Partnership for such services the amount of $1,088, $1,133,
and $559, respectively which are included in general and administrative
expenses.
The
vessel-owning companies of the Initial Vessels and the vessel-owning companies
of the M/T Attikos, M/T Amore Mio II, M/T Aristofanis, M/T Agamemnon II and the
M/T Ayrton II (the “Non-Contracted Vessels”) had related-party transactions with
CMTC and its subsidiaries before their acquisition by CPP mainly for the
following reasons:
|
|
●
|
Equity
investment,
|
|
|
●
|
Loan
agreements that CMTC entered into, acting as the borrower, for the
financing of the construction of five of the Initial
Vessels,
|
|
|
●
|
Manager
payments on behalf of the vessel-owning companies and hire receipts from
charterers,
|
|
|
●
|
Manager
fixed monthly fees, (which were based on agreements with different terms
and conditions than those in the Partnership’s administrative and
management agreements) for providing services such as chartering,
technical support and maintenance, insurance, consulting, financial and
accounting services, (Note 8),
|
|
|
●
|
Funds
advanced/received to/from entities with common ownership,
and
|
|
|
●
|
Loan
draw downs in excess of the advances made to the shipyard by the Manager
for the funding of vessels’ extra
costs.
|
F-18
|
3.
|
Transactions
with Related Parties – Continued
|
Balances with related parties
consisted of the following:
|
As
of
December
31, 2009
|
As
of
December
31, 2008
|
|||||||
|
Due
To Related Parties:
|
||||||||
|
CMTC
– loans current portion (a)
|
$ | $ | 24,538 | |||||
|
CMTC
– loans long–term portion (a)
|
27,762 | |||||||
|
Manager
– payments on behalf of the Partnership (b)
|
2,691 | 584 | ||||||
|
Management
fee payable to CSM (c)
|
2,248 | |||||||
|
Manager
– payments on behalf of vessel-owning companies (d)
|
1,672 | |||||||
|
Total
due to related parties
|
$ | 4,939 | $ | 54,556 | ||||
|
|
(a)
|
CMTC
Loans: For the financing of the of the M/T Atlantas, M/T Aktoras,
M/T Aiolos, M/T Avax, M/T Assos, M/T Agamemnon II, M/T Ayrton II, and the
acquisition of the M/T Amore Mio II, CMTC was the borrower under separate
loan agreements and the respective vessel-owning companies acted as
guarantors.
|
|
|
As
of December 31, 2008 the balance of these loans was $52,300. A summary of
the CMTC loans is shown below:
|
|
Bank
Loans
|
Entity
|
Vessel
|
As
of
December
31, 2009
|
As
of
December
31,
2008
|
|||||||||
|
(i)
|
Issued
in November, 2008
maturing
in November, 2020 (Post Delivery loan agreement)
|
Capital
Maritime & Trading Corp.
|
M/T
Agamemnon II
|
$ | $ | 29,400 | |||||||
|
(ii)
|
Issued
in June, 2008
maturing
upon vessel’s delivery from shipyard (Pre-Delivery loan
agreement).
|
Capital
Maritime & Trading Corp.
|
M/T
Ayrton II
|
$ | 22,900 | ||||||||
|
Total
|
$ | $ | 52,300 | ||||||||||
|
Less:
Current portion
|
24,538 | ||||||||||||
|
Long-term
portion
|
$ | $ | 27,762 | ||||||||||
As a
result of the exchange of the vessel-owning company of M/T Assos with the
vessel-owning company of M/T Agamemnon II, CMTC substituted the collateral and
the guarantor company under this loan. M/T Assos is now the collateral and its
vessel owning company is the guarantor under this loan. The related-party loan
relating to M/T Ayrton II was repaid by CMTC upon delivery of the vessel from
the shipyard in April, 2009.
On March
20, 2008 the balance of the related party loan for M/T Amore Mio II amounting to
$52,463 was fully repaid by CMTC. On April 4, 2007, the M/T Atlantas’, M/T
Aktoras’, M/T Aiolos’, M/T Avax’ and M/T Assos’ outstanding loan balances, which
amounted to $133,958, were settled in full by CMTC by the offering proceeds
(Note 1).
The bank
loans were secured by a first preferred mortgage on the respective vessels and a
general assignment of the earnings, insurances, mortgage interest insurance, and
requisition compensation of the respective vessels. Interest expense for the
related-party loans for the year ended December 31, 2009, 2008 and 2007 amounted
to $281, $839 and $3,594 respectively.
F-19
|
3.
|
Transactions
with Related Parties – Continued
|
|
|
(a)
|
CMTC
Loans - Continued:
|
The loan
agreements contained other customary ship finance covenants, including
restrictions as to: changes in management and ownership of the mortgaged
vessels, the incurrence of additional indebtedness, the mortgaging of vessels,
the minimum cash requirement, as well as minimum requirements as to the
applicable vessels’ market value and insured value in relation to the
outstanding balance of the applicable loan. Also the borrower may pay dividends
or make distributions when no event of default has occurred and the payment of
such dividend or distribution has not resulted in a breach of any of the
financial covenants.
|
|
(b)
|
Manager -
Payments on Behalf of Capital Product Partners L.P.: Following the IPO, the
Manager invoices the Partnership for payments it makes on behalf of the
Partnership and its subsidiaries.
|
|
|
(c)
|
Management
fee payable to CSM: The amount outstanding as of December 31, 2009,
represents the management fee payable to CSM as a result of the management
agreement the Partnership entered into with CSM (Note
1).
|
|
|
(d)
|
Manager -
payments and receipts on behalf of vessel-owning companies: This
payable includes:
|
|
|
●
|
the
settlement of vessels’ obligations related to pre-delivery
expenses,
|
|
|
●
|
the
settlement of vessels’ obligations during its operation as part of the
CMTC fleet,
|
|
|
●
|
reduced
by the amounts received by the Manager from the vessel-owning subsidiaries
during its operations as part of the CMTC
fleet.
|
F-20
|
4.
|
Vessels
|
An
analysis of vessels is as follows:
|
As
of
December
31, 2009
|
As
of
December
31, 2008
|
|||||||
|
Cost:
|
||||||||
|
New
buildings advances
|
$ | $ | 28,667 | |||||
|
Vessels
|
704,639 | 734,308 | ||||||
|
Total
cost
|
704,639 | 762,975 | ||||||
|
Less:
accumulated depreciation
|
(65,916 | ) | (44,822 | ) | ||||
|
Vessels,
net
|
$ | 638,723 | $ | 718,153 | ||||
All of
the Partnership’s vessels as of December 31, 2009 have been provided as
collateral to secure the Partnership’s two credit facilities.
On April
7 and April 13, 2009 the Partnership acquired from CMTC the shares of the
vessel-owning companies of the M/T Agamemnon II and the M/T Ayrton II,
respectively. In exchange, CMTC received all the shares of the vessel-owning
company of the M/T Atrotos, which was part of the Committed Vessels, the shares
of the vessel-owning company of the M/T Assos, which was part of the Initial
Vessels, and an additional cash consideration of $8,000 (Note 1). The amount of
$15,708 which represents the difference of the historic cost between the
exchanged vessels net of cash consideration of $8,000 is recorded as an increase
in the partners’ capital for the year ended December 31, 2009. In addition, the
amount of $8,000 is included in vessels acquisitions under investing activities
in the statements of cash flows for the year ended December 31,
2009.
In
December 2009, the M/T Attikos underwent improvements which amounted to $1,179,
which are included in the vessel’s historic cost.
On January 29, March 27, April 30, June 17, and August
20, 2008 the Partnership acquired from CMTC the shares of the vessel-owning
companies of M/T Alexandros II, M/T Amore Mio II, M/T Aristofanis, M/T
Aristotelis II and M/T Aris II respectively, for a total purchase price of
$251,305, including cash and share consideration of $203,500 and $47,805,
respectively (Note 1). In 2008, the M/T Aristofanis underwent improvements which
amounted to $1,194 and which were capitalized as part of vessel’s historic cost.
These improvements took place before the acquisition of the vessel by the
Partnership. The vessels have been recorded in the Partnership's financial
statements at the amount of $236,222 which represents net book value of the
vessels reflected in CMTC consolidated financial statements at the time of
transfer to the Partnership. The amount of the purchase price in excess of
CMTC’s basis of the assets of $15,083 was recognized as a reduction of partners'
capital. Of the total excess, the amount of
$3,755 represents the cash purchase price in excess of CMTC’s basis of the M/T
Alexandros II, M/T Aristotelis II and Aris II and is presented as a financing
activity in the statements of cash flows for the year ended December 31,
2008.
On May 8, July 13, September 20, September 24, and
September 28, 2007, the Partnership acquired from CMTC the shares of
vessel-owning companies of M/T Atrotos, M/T Akeraios, M/T Apostolos, M/T
Attikos, and M/T Anemos I, respectively, for a total purchase price of $247,000.
The vessels have been recorded in the Partnership's financial statements at the
amount of $166,134 which represents net book value of vessels reflected in CMTC
consolidated financial statements at the time of transfer to the Partnership.
The amount of the purchase price in excess of CMTC’s basis of the assets of
$80,866 was recognized as a reduction of partners' capital and is presented also as a financing activity in the
statements of cash flows.
The net
book value of the Initial Vessels upon their acquisition by the Partnership
amounted to $273,548.
F-21
|
5.
|
Long-Term
Debt
|
Long-term
debt consists of the following:
|
Bank
Loans
|
Entity
|
As
of
December
31,
2009 |
As
of
December
31,
2008
|
||||||||
|
(i)
|
Issued
in April, 2007
maturing
in June, 2017
|
Capital
Product Partners L.P.
|
$ | 366,500 | $ | 366,500 | |||||
|
(ii)
|
Issued
in March, 2008
maturing
in March 2018
|
Capital
Product Partners L.P.
|
107,500 | 107,500 | |||||||
|
Total
|
$ | 474,000 | $ | 474,000 | |||||||
|
Less:
Current portion
|
|||||||||||
|
Long-term
portion
|
$ | 474,000 | $ | 474,000 | |||||||
On March
19, 2008 the Partnership entered into a new loan agreement with a syndicate of
financial institutions including HSH Nordbank AG (the “Agent”), for a non
amortizing credit facility, of up to $350,000 for the financing of:
|
●
|
Partial
acquisition cost of up to $57,500 for Amore Mio II and
Aristofanis
|
|
●
|
50%
of the acquisition cost of up to $52,500 for M/T Alkiviadis and M/T
Aristidis
|
|
●
|
50%
of the acquisition cost of up to $240,000 for any further modern
tanker
|
In
addition the Partnership drew from this credit facility the amount of $28,000
and $22,000 in order to partially finance the acquisition of the shares of the
vessel-owning companies of the M/T Aristotelis II and M/T Aris II
respectively.
Borrowings
under this credit facility are jointly and severally secured by the
vessel-owning companies of the collateral vessels.
The
credit facility of up to $350,000 is non-amortizing up to March 2013 and will be
repaid by twenty equal consecutive three-month installments commencing in June
2013 plus a balloon payment due in March 2018. Loan commitment fees are
calculated at 0.325% p.a. on any amount not drawn-down and are paid
quarterly.
On March
22, 2007, the Partnership entered into a loan agreement with a syndicate of
financial institutions including HSH Nordbank AG, Hamburg for a revolving credit
facility, of up to $370,000 for the financing of the acquisition cost, or part
thereof, up to fifteen medium range product tankers. Borrowings under this
credit facility are jointly and severally secured by the vessel-owning companies
of the fifteen vessels (Initial and Committed Vessels). This credit facility is
non amortizing up to June 2012 and will be repaid in twenty equal consecutive
quarterly installments commencing in September, 2012 plus a balloon payment due
in June, 2017. Loan commitment fees are calculated at 0.20% p.a. on any undrawn
amount and are paid quarterly. This credit facility was amended on September 19,
2007 to include the financing of the acquisition cost of the M/T Attikos and was
further supplemented on June 11, 2008 to, amongst others, amend the provisions
relating to security offered under the facility.
F-22
5. Long-Term
Debt – Continued
The
Partnership’s drawn downs under its credit facilities are as
follows:
|
Vessel
/ Entity
|
Date
|
$370,000
Credit Facility
|
$350,000
Credit Facility
|
|||||||
|
Capital
Product Partners L.P. (1)
|
04/04/2007
|
$ | 30,000 | |||||||
|
M/T
Atrotos (1)
|
05/08/2007
|
56,000 | ||||||||
|
M/T
Akeraios
|
07/13/2007
|
56,000 | ||||||||
|
M/T
Apostolos
|
09/20/2007
|
56,000 | ||||||||
|
M/T
Attikos
|
09/24/2007
|
20,500 | ||||||||
|
M/T
Anemos I
|
09/28/2007
|
56,000 | ||||||||
|
M/T
Alexandros II
|
01/29/2008
|
48,000 | ||||||||
|
M/T
Amore Mio II
|
03/27/2008
|
$ | 46,000 | |||||||
|
M/T
Aristofanis
|
04/30/2008
|
11,500 | ||||||||
|
M/T
Aristotelis II
|
06/17/2008
|
20,000 | 28,000 | |||||||
|
M/T
Aris II
|
08/20/2008
|
24,000 | 22,000 | |||||||
|
Total
|
$ | 366,500 | $ | 107,500 | ||||||
|
(1)
|
Following
the exchange of the vessel-owning companies of the M/T Assos and the M/T
Atrotos by the vessel-owning companies of the M/T Agamemnon II and the M/T
Ayrton II, the major terms of the Partnership’s credit facilities except
of the substitutions of guarantors, remained
unchanged.
|
As of
December 31, 2009, the amount of $3,500 and $242,500 of the Partnership’s
revolving credit facilities of up to $370,000 and $350,000 respectively had not
been drawn down.
For the
years ended December 31, 2009, 2008 and for the period from April 4, 2007 to
December 31, 2007 the Partnership recorded interest expense of $30,508, $23,459
and $10,935, respectively. As of December 31, 2009 the weighted average interest
rate of the Partnership’s loan facilities was 6.57%.
On April
29, 2008 and September 6, 2007, the outstanding loan balances of the M/T
Aristofanis and the M/T Attikos which amounted to $8,080 and $7,000
respectively, were fully paid by CMTC. Furthermore, on April 4, 2007, the M/T
Arionas’, the M/T Agisilaos’ and the M/T Axios’ outstanding loan balances, which
amounted to $79,885, were settled in full by CMTC by the offering proceeds (Note
1).Interest expense for the combined loans for the years ended December 31, 2008
and 2007 amounted to $124 and $1,856 respectively.
The
Partnership’s credit facilities contain a “Market Disruption Clause” where the
lenders, at their discretion, may impose additional interest margin if their
borrowing rate exceeds effective interest rate stated in the loan agreement with
the Partnership. For the years ended December 31, 2009 the Partnership incurred
an additional interest expense in the amount of $1,799 due to the “Market
Disruption Clause”. For the years ended December 31, 2008 and 2007, the
Partnership did not incur any additional interest expense relating to “Market
Disruption Clause.”
The
credit facilities have a general assignment of the earnings, insurances and
requisition compensation of the respective vessel or vessels. Each also requires
additional security, including: pledge and charge on current account; corporate
guaranteed from each of the eighteen vessel-owning companies, and mortgage
interest insurance. Following the swap agreements
that the Partnership has entered into, the interest rate under the two
revolving credit facilities is fixed (Note 6).
The loan
agreements also contain other customary ship finance covenants, including
restrictions as to: changes in management and ownership of the mortgaged
vessels, the incurrence of additional indebtedness, the mortgaging of vessels,
the ratio of EBITDA to Net Interest Expenses shall be no less than 2:1, minimum
cash requirement of $500 per vessel of which 50% may be constituted by undrawn
commitments under the revolving facility, as well as the ratio of net Total
Indebtedness to the aggregate Market Value of the total fleet shall not exceed
0.80:1. The credit facilities also contain the collateral maintenance
requirement in which the aggregate average fair market value, as defined in the
amendment dated June 30, 2009, of the collateral vessels shall be no less than
125% of the aggregate outstanding amount under these facilities. Also the
vessel-owning companies may pay dividends or make distributions when no event of
default has occurred and the payment of such dividend or distribution has not
resulted in a breach of any of the financial covenants. As of December 31, 2009,
the Partnership was in compliance with all financial debt
covenants.
On June
30, 2009, the Partnership reached an agreement with its lenders to amend certain
covenants in the credit facilities. It was agreed to increase the fleet
loan-to-value covenant to 80% from 72.5% in both of its credit facilities. It
was also agreed that a number of CPP vessels currently on long term period
charter with certain of our top rated charterers will be valued on the basis of
their current estimated fair value plus the value of their remaining charter
instead of charter free. In exchange, the interest margin for both of the CPP
credit facilities was increased to 1.35% - 1.45% over LIBOR subject to the level
of the asset covenants. These amendments were effective immediately and are
valid until June 2012. All other terms in both of the Partnership’s facilities
remain unchanged. The margins prior to the amendment of the terms were 0.75%
over LIBOR for the $370,000 credit facility and 1.10% over LIBOR for the
$350,000 credit facility.
The
required annual loan payments to be made subsequent to December 31, 2009 are as
follows:
|
Bank
loans repayment schedule
|
||||||||||||
|
Year
ended
December
31,
|
(i)
|
(ii)
|
Total
|
|||||||||
|
2010
|
||||||||||||
|
2011
|
||||||||||||
|
2012
|
18,325 | 18,325 | ||||||||||
|
2013
|
36,650 | 8,063 | 44,713 | |||||||||
|
2014
|
36,650 | 10,750 | 47,400 | |||||||||
|
Thereafter
|
274,875 | 88,687 | 363,562 | |||||||||
|
Total
|
366,500 | 107,500 | 474,000 | |||||||||
F-23
|
6.
|
Financial
Instruments
|
Derivative
Instruments
All
derivatives are carried at fair value on the consolidated balance sheet at each
period end. Balances as of December 31, 2009 and 2008 are as
follows:
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Interest
Rate Swaps
|
Total
|
Interest
Rate Swaps
|
Total
|
|||||||||||||
|
Long-term
liabilities
|
$ | (36,931 | ) | $ | (36,931 | ) | $ | (47,414 | ) | $ | (47,414 | ) | ||||
| $ | (36,931 | ) | $ | (36,931 | ) | $ | (47,414 | ) | $ | (47,414 | ) | |||||
Tabular
disclosure of financial instruments is as follows:
|
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||||||||
|
December
31,
2009 |
December
31, 2008
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||
|
Derivatives
designated as hedging instruments
|
Balance
Sheet Location
|
Fair
value
|
Fair
value
|
Balance
Sheet Location
|
Fair
value
|
Fair
value
|
||||||||||
|
Interest
rate swaps
|
Financial
instruments
Long-term
liabilities
|
$ | 36,931 | $ | 47,414 | |||||||||||
|
Total
derivatives designated as hedging instruments
|
Total
derivatives designated as hedging instruments
|
$ | 36,931 | $ | 47,414 | |||||||||||
The
Effect of Derivative Instruments on the Statement of Changes in Partners’ Capital is as
follows:
|
Derivatives
for cash flow hedging relationships
|
Amount
of Gain/(Loss) Recognized in OCI on
Derivative
(Effective Portion)
|
|||||||||||
|
For
the year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
rate swaps
|
$ | 10,483 | $ | (33,363 | ) | $ | (10,288 | ) | ||||
|
Total
|
10,483 | (33,363 | ) | (10,288 | ) | |||||||
The Effect of Derivative
Instruments on the Statements of Income is as follows:
|
Derivatives
designated as
hedging
instruments
|
Location
of Gain or (Loss)
Recognized
|
Amount
of Gain/(Loss) (Ineffective Portion)
|
||||||||
|
For
the year ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
Interest
rate swaps
|
Loss
on interest rate agreements
|
|
|
$(3,763)
|
||||||
|
Total
|
$(3,763)
|
|||||||||
The fair
value of the Partnership’s interest rate swaps is the estimated amount the
Partnership would pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of
the Partnership and its counter parties.
F-24
The
Partnership follows the accounting guidance for derivative instruments which
requires new disclosure that establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This guidance enables the reader of the financial
statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The statement requires that assets
and liabilities carried at fair value will be classified and disclosed in one of
the following three categories:
Level 1:
Quoted market prices in active markets for identical assets or
liabilities;
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data;
Level 3:
Unobservable inputs that are not corroborated by market data.
The
Partnership’s interest rate swap agreements, entered into pursuant to its loan
agreements, are based on LIBOR swap rates. LIBOR swap rates are observable
at commonly quoted intervals for the full terms of the swaps and therefore are
considered Level 2 items. The fair values of the interest rate swap
determined through Level 2 of the fair value hierarchy are derived principally
from or corroborated by observable market data. Inputs include quoted prices for
similar assets, liabilities (risk adjusted) and market-corroborated inputs, such
as market comparables, interest rates, yield curves and other items that allow
value to be determined. Fair value of the interest rate swaps is determined
using a discounted cash flow method based on market-base LIBOR swap yield
curves.
| December 31, |
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|||||||
|
Description
|
2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||
|
Derivatives
|
$ | (36,931 | ) | $ | (36,931 | ) | ||||
|
Total
|
$ | (36,391 | ) | $ | (36,931 | ) | ||||
The
Partnership entered into eight interest rate swap agreements that were
transferred from CMTC through novation agreements on April 4, 2007 (“Novation
Date”). The Partnership recognized a loss of $3,763 in its income statement
which resulted from the negative valuation of the eight interest rate swap
agreements at the Novation Date. Furthermore the Partnership has entered into
six additional swap agreements to fix the LIBOR portion of its outstanding debt.
As of December 31, 2009, all of the Partnerships debt has been
swapped.
As of
December 31, 2009 all of the Partnership’s interest rate swaps qualify as a cash
flow hedge and the changes in their fair value are recognized in accumulated
other comprehensive income/(loss).
|
Bank
|
Currency
|
Notional
Amount
|
Fixed
rate
|
Trade
date
|
Value
date
|
Maturity
date
|
Fair
market
value
as of
December
31, 2009
|
|||||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
30,000 | 5.1325 | % | 02.20.2007 | 04.04.2007 | 06.29.2012 | $ | (2,548 | ) | ||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
56,000 | 5.1325 | % | 02.20.2007 | 05.08.2007 | 06.29.2012 | (4,757 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
56.000 | 5.1325 | % | 02.20.2007 | 07.13.2007 | 06.29.2012 | (4,757 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
56,000 | 5.1325 | % | 02.20.2007 | 09.28.2007 | 06.29.2012 | (4,757 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
56,000 | 5.1325 | % | 02.20.2007 | 09.20.2007 | 06.29.2012 | (4,757 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
24,000 | 5.1325 | % | 02.20.2007 | 01.29.2008 | 06.29.2012 | (2,039 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
24,000 | 5.1325 | % | 02.20.2007 | 01.29.2008 | 06.29.2012 | (2,039 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
24,000 | 5.1325 | % | 02.20.2007 | 08.20.2008 | 06.29.2012 | (2,039 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
20,500 | 4.9250 | % | 09.20.2007 | 09.24.2007 | 06.29.2012 | (1,636 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
46,000 | 3.5250 | % | 03.25.2008 | 03.27.2008 | 03.27.2013 | (2,010 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
11,500 | 3.8950 | % | 04.24.2008 | 04.30.2008 | 03.28.2013 | (639 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
20,000 | 4.5200 | % | 06.13.2008 | 06.17.2008 | 06.28.2012 | (1,394 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
28,000 | 4.6100 | % | 06.13.2008 | 06.17.2008 | 03.28.2013 | (2,195 | ) | |||||||||||||||||
|
HSH
Nordbank AG
|
USD
|
22,000 | 4.0990 | % | 08.14.2008 | 08.20.2008 | 03.28.2013 | (1,364 | ) | |||||||||||||||||
|
Total
derivative instruments fair value
|
$ | (36,931 | ) | |||||||||||||||||||||||
F-25
|
7.
|
Accrued
Liabilities
|
Accrued
liabilities consist of the following:
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accrued
loan interest and loan fees
|
$ | 138 | $ | 292 | ||||
|
Accrued
wages and crew expenses
|
73 | |||||||
|
Accrued
operating expenses
|
1,734 | 76 | ||||||
|
Accrued
voyage expenses and commissions
|
64 | 243 | ||||||
|
Accrued
general and administrative expenses
|
337 | 465 | ||||||
|
Total
|
$ | 2,273 | $ | 1,149 | ||||
|
8.
|
Voyage
Expenses and Vessel Operating
Expenses
|
Voyage
expenses and vessel operating expenses consist of the following:
|
For
the years ended December 31,
|
||||||||||||
|
2009
(Note
1)
|
2008
(Note
1)
|
2007
(Note
1)
|
||||||||||
|
Voyage
expenses:
|
||||||||||||
|
Commissions
|
$ | 1,005 | $ | 1,032 | $ | 1,010 | ||||||
|
Bunkers
|
41 | 91 | 1,276 | |||||||||
|
Port
expenses
|
1,192 | |||||||||||
|
Other
|
13 | 75 | ||||||||||
|
Total
|
$ | 1,059 | $ | 1,123 | $ | 3,553 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Crew
costs and related costs
|
$ | 311 | $ | 737 | $ | 3,408 | ||||||
|
Insurance
expense
|
39 | 103 | 423 | |||||||||
|
Spares,
repairs, maintenance and other expenses
|
723 | 2,541 | 1,305 | |||||||||
|
Stores
and lubricants
|
67 | 384 | 883 | |||||||||
|
Management
fees (Note 3)
|
26,457 | 24,650 | 12,688 | |||||||||
|
Vetting,
insurances, spares and repairs (Note 3)
|
2,963 | 1,002 | ||||||||||
|
Other
operating expenses
|
34 | 39 | 268 | |||||||||
|
Total
|
$ | 30,594 | $ | 29,456 | $ | 18,975 | ||||||
F-26
|
9.
|
Income
Taxes
|
Under the
laws of the countries of the vessel-owning subsidiaries’ incorporation and/or
vessels’ registration, these companies are not subject to tax on international
shipping income. However, they are subject to registration and tonnage taxes,
which have been included in vessel operating expenses in the accompanying
combined statements of operations.
Based on
its current operations, the Partnership does not expect to have U.S. source
domestic transportation income. However, to the extent that certain
of the Partnership’s current activities or those as a result of future expansion
give rise to income attributable to transportation that begins or ends, or both
begins and ends in the United States, such income could be subject to U.S.
federal income taxation, unless the exemption from U.S. taxation under Section
883 of the Code applies. This exemption provides that a qualifying
non-U.S. corporation that satisfies certain requirements will not be subject to
the net basis and branch taxes or 4.0% gross basis tax on its income
attributable to transportation that begins or ends in the United
States.
|
10.
|
Cash
Flow
|
The
following assets, liabilities and equity accounts were included in the combined
balance sheets of CMTC entities, however, these amounts were retained by CMTC on
April 3, 2007, September 23, 2007, March 26, 2008, April 29, 2008, April 6, 2009
and April 12, 2009, when the shares of the vessel-owning companies of the
Initial Vessels, the M/T Attikos, the M/T Amore Mio II, the M/T Aristofanis, the
M/T Agamemnon II and the M/T Ayrton II were transferred from CMTC to the
Partnership respectively (Note 1). The cash flows for the years ended
December 31, 2009, 2008 and 2007 are adjusted accordingly to exclude the
following assets and liabilities accounts as they did not result in cash inflows
or outflows in consolidated and combined financial statements:
|
As
of December 31, 2009
|
As
of December 31, 2008
|
As
of December 31, 2007
|
||||||||||
|
Cash
and cash equivalents
|
$ | $ | 2 | $ | 2,251 | |||||||
|
Trade
receivables
|
113 | 1,037 | 2,040 | |||||||||
|
Due
from related parties
|
11 | 4,497 | 7,598 | |||||||||
|
Prepayments
and other assets
|
69 | 353 | 428 | |||||||||
|
Inventories
|
272 | 143 | 328 | |||||||||
|
Deferred
charges
|
69 | 251 | 1,423 | |||||||||
|
Total
assets
|
534 | 6,283 | 14,068 | |||||||||
|
Trade
accounts payable
|
673 | 1,913 | 2,395 | |||||||||
|
Due
to related parties
|
1,777 | 1,194 | 5,517 | |||||||||
|
Accrued
liabilities
|
166 | 418 | 843 | |||||||||
|
Deferred
revenue
|
5,213 | |||||||||||
|
Borrowings
|
28,991 | 76,997 | 213,843 | |||||||||
|
Total
liabilities
|
31,607 | 80,522 | 227,811 | |||||||||
|
Net
liabilities assumed by CMTC upon contribution to the
Partnership
|
31,073 | 74,239 | 213,743 | |||||||||
The cash
and cash equivalents of $2 and $2,251 are presented as cash dividend in the
accompanying consolidated and combined cash flow statements for the years ended
December 31, 2008 and 2007 respectively.
The
supplemental disclosure of “Cash paid for interest” for the year ended December
31, 2008 has been revised to correct for an error. The Partnership previously
reported cash paid for interest of $18,163 rather than the corrected figure of
$24,264. This revision does not affect the Partnership’s financial position,
results of operations or cash flows for the periods
presented.
F-27
|
11.
|
Partners’
Capital / Stockholders’ Equity and
Distributions
|
General:
The partnership agreement requires that within 45 days after the end of each
quarter, beginning with the quarter ending June 30, 2007, all of the
Partnership’s available cash will be distributed to unitholders.
Definition of
Available Cash: Available Cash, for each fiscal quarter,
consists of all cash on hand at the end of the quarter:
|
|
●
|
less
the amount of cash reserves established by our board of directors
to:
|
|
|
●
|
provide
for the proper conduct of Partnership’ s business (including reserves for
future capital expenditures and for our anticipated credit
needs);
|
|
|
●
|
comply
with applicable law, any of Partnership’s debt instruments, or
other agreements; or
|
|
|
●
|
provide
funds for distributions to Partnership’s unitholders and to general
partner for any one or more of the next four
quarters;
|
|
|
●
|
plus
all cash on hand on the date of determination of available cash for the
quarter resulting from working capital borrowings made after the end of
the quarter. Working capital borrowings are generally borrowings that are
made under our credit agreement and in all cases are used solely for
working capital purposes or to pay distributions to
partners.
|
General Partner
Interest and Incentive Distribution Rights: The General Partner has a 2%
interest in the Partnership as well as the incentive distribution
rights.
Incentive
distribution rights represent the right to receive an increasing percentage of
quarterly distributions of available cash from operating surplus after the
minimum quarterly distribution and the target distribution levels have been
achieved. The Partnership’s general partner as of December 31, 2009, 2008 and
2007 holds the incentive distribution rights.
The
following table illustrates the percentage allocations of the additional
available cash from operating surplus among the unitholders and general partner
up to the various target distribution levels. The amounts set forth under
‘‘Marginal Percentage Interest in Distributions’’ are the percentage interests
of the unitholders and general partner in any available cash from operating
surplus that is being distributed up to and including the corresponding amount
in the column ‘‘Total Quarterly Distribution Target Amount,’’ until available
cash from operating surplus we distribute reaches the next target distribution
level, if any. The percentage interests shown for the unitholders and general
partner for the minimum quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly
distribution.
|
|
|
Marginal
Percentage Interest
in
Distributions
|
|||||||||||
|
|
Total
Quarterly
Distribution
Target Amount
|
Unitholders
|
General
Partner
|
||||||||||
|
Minimum
Quarterly Distribution
|
$ | 0.3750 | 98 | % | 2 | % | |||||||
|
First
Target Distribution
|
up to |
$0.4313
|
98 | % | 2 | % | |||||||
|
Second
Target Distribution
|
above |
$0.4313
|
up to $0.4688 | 85 | % | 15 | % | ||||||
|
Third
Target Distribution
|
above |
$0.4688
|
up to $0.5625 | 75 | % | 25 | % | ||||||
|
Thereafter
|
above |
$0.5625
|
50 | % | 50 | % | |||||||
Subordinated
Units: All of the
Partnership’s subordinated units were held by CMTC. The Partnership agreement
provided that, during the subordination period, the common units had the right
to receive distributions of available cash from operating surplus in an amount
equal to the minimum quarterly distribution of $0.3750 per quarter, plus any
arrearages in the payment of the minimum quarterly distribution on the common
units from prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units. Distribution arrearages
did not accrue on the subordinated units. The purpose of the subordinated units
was to increase the likelihood that during the subordination period there was
available cash to be distributed on the common units.
Early Termination
of Subordination Period: The payment of the exceptional distribution of
$1.05 per unit in February 2009 brought annual distributions to unitholders to
$2.27 per unit for the year ended December 31, 2008, a level which under the
terms of the partnership agreement resulted in the early termination of the
subordination period and the conversion of the subordinated units into common
units on a one to one basis. Under the partnership agreement the subordination
period would have ended in April 2011, if the Partnership had earned and paid at
least $0.375 on each outstanding unit and corresponding distribution on the
general partners’ 2.0% for any three consecutive four-quarter
periods.
F-28
|
11.
|
Partners’
Capital / Stockholders’ Equity and Distributions –
Continued
|
Distributions of
Available Cash From Operating Surplus During the Subordination Period:
The Partnership agreement
required that we make distributions of available cash from operating
surplus for any quarter during the subordination period in the following
manner:
|
●
|
first,
98% to the common unitholders, pro rata, and 2.0% to our general partner,
until we distribute for each outstanding common unit an amount equal to
the minimum quarterly distribution for that
quarter;
|
|
●
|
second,
98% to the common unitholders, pro rata, and 2.0% to our general partner,
until we distribute for each outstanding common unit an amount equal to
any arrearages in payment of the minimum quarterly distribution on the
common units for any prior quarters during the subordination
period;
|
|
●
|
third,
98% to the subordinated unitholders, pro rata, and 2.0% to our general
partner, until we distribute for each subordinated unit an amount equal to
the minimum quarterly distribution for that quarter;
and
|
|
●
|
Thereafter,
in the manner described in the above table under section “General Partner
Interest and Incentive Distribution
Rights”.
|
Distributions of
Available Cash From Operating Surplus After the Subordination Period:
Our Partnership agreement
requires that we will make distributions of available cash from operating
surplus for any quarter after the subordination period in the following
manner:
|
●
|
first,
98% to all unitholders, pro rata, and 2.0% to our general partner, until
we distribute for each outstanding unit an amount equal to the minimum
quarterly distribution for that quarter;
and
|
|
●
|
Thereafter,
in the manner described in the above table under section “General Partner
Interest and Incentive Distribution
Rights”.
|
As of December 31, 2009 our
partners’ capital included the following units:
|
As
of December 31, 2009
|
||||
|
Limited
partner units
|
24,817,151 | |||
|
Number
of limited partner units outstanding
|
24,817,151 | |||
|
General
partner units
|
506,472 | |||
|
Total
partnership units
|
25,323,623 | |||
As of
December 31, 2009, the Partnership’s units consisted of 24,817,151 common units,
of which 13,512,500 units are held by third parties and 11,304,651 units are
held by CMTC and 506,472 general partner units are held by the CGP, a wholly
owned subsidiary of CMTC.
During
the years ended December 31, 2009, 2008 and 2007, the Partnership declared and
paid dividends amounting to $70,463, $39,890 and $17,026,
respectively.
Stockholders’
Equity in the combined Statements of Changes in Stockholders’ Equity
reflects:
|
●
|
the
capital contribution made by CMTC in connection with the acquisition of
the Initial and the Non-Contracted Vessels from the shipyards or their
previous owners (in the case of the M/T Amore Mio II). For the year ended
December 31, 2009, 2008 and 2007, such contributions amounted to $40,570,
$12,135 and $31,279 respectively,
|
|
●
|
the
cumulative earnings of the Initial and the Non-Contracted
Vessels during their operations as part of CMTC’s fleet
and
|
|
●
|
the
reduction in the stockholders’ equity during the years ended December 31,
2009, 2008 and 2007 represents the equity which was retained by CMTC upon
the contribution of the Initial and the Non-Contracted Vessels to the
Partnership.
|
F-29
|
12.
|
Net
Income (Loss) Per Unit
|
The
general partner’s, common unit holders’ and subordinated unitholders’ interests
in net income are calculated as if all net income for periods subsequent to
April 4, 2007, were distributed according to the terms of the Partnership’s
Agreement, regardless of whether those earnings would or could be distributed.
The Partnership Agreement does not provide for the distribution of net income;
rather, it provides for the distribution of available cash (Note 11), which is a
contractually-defined term that generally means all cash on hand at the end of
each quarter after establishment of cash reserves established by the
Partnership’s board of directors to provide for the proper resources for the
Partnership’s business. Unlike available cash, net income is affected by
non-cash items. On January 1, 2009, the Partnership adopted new accounting
guidance relating to the Application of the Two-Class Method and its
application to Master Limited Partnerships which considers whether the incentive
distributions of a master limited partnership represent a participating security
when considered in the calculation of earnings per unit under the Two-Class
Method. This new guidance also considers whether the partnership agreement
contains any contractual limitations concerning distributions to the incentive
distribution rights that would impact the amount of earnings to allocate to the
incentive distribution rights for each reporting period. The Partnership
retrospectively applied the provisions of this new guidance to the years ended
December 31, 2007 and 2008. Following the application of the above guidance our
earnings per unit for the year ended December 31, 2008, decreased from $2.00 to
$1.54. For the year ended December 31, 2007 our earnings per unit remained
unchanged.
Under the
Partnership Agreement, the holder of the incentive distribution rights in the
Partnership, which is currently the CGP, assuming that there are no cumulative
arrearages on common unit distributions, has the right to receive an increasing
percentage of cash distributions after the minimum quarterly distribution (Note
11).
During
the year ended December 31, 2009, the Partnership’s net income did not exceed
the First Target Distribution Level (Note 11), and as a result, the assumed
distribution of net income did not result in the use of increasing percentages
to calculate CGP’ s interest in net income. During the year ended December 31,
2008 the Partnership’s net income exceeded the First Target Distribution level
(Note 11), and as a result, increasing percentages have been used in order to
calculate the CGP’s interest in net income. The amount allocated to CGP as a
result of the incentive distributions amounted to $12,724 for the year ended
December 31, 2008. During the period from April 4, 2007 to December 31, 2007,
the Partnership’s net income did not exceed the First
Target Distribution level (Note 11), and as a result, the assumed
distribution of net income did not result in the use of increasing percentages
to calculate CGP’ s interest in net income.
|
|
The
amount of historical earnings per unit
for:
|
|
|
a.
|
the
period from January 1, 2007 to April 3, 2007 for the Initial
Vessels,
|
|
|
b.
|
the
period from January 1, 2007 to September 23, 2007, March 26, 2008 and
April 29, 2008 for the M/T Attikos, the M/T Amore Mio II and the M/T
Aristofanis respectively and
|
|
|
c.
|
the
year ended December 31, 2007 and 2008 and for the period from January 1,
2009 to April 6, 2009 and April 12, 2009 for the M/T Agamemnon II, and the
M/T Ayrton II respectively,
|
giving
retroactive impact to the number of common and subordinated units (and the 2%
general partner interest) that were issued, is not presented in the combined
financial statements. The Partnership believes that a presentation of earnings
per unit for these periods would not be meaningful to our investors as the
vessels comprising our current fleet were either under construction or operated
as part of CMTC’s fleet with different terms and conditions than those in place
after their acquisition by us.
F-30
13. Commitments
and Contingencies
Various
claims, suits, and complaints, including those involving government regulations
and product liability, arise in the ordinary course of the shipping business. In
addition, losses may arise from disputes with charterers, agents, insurance and
other claims with suppliers relating to the operations of the Partnership’s
vessels. The Partnership is not aware of any such claims or contingent
liabilities, which should be disclosed, or for which a provision should be
established in the accompanying consolidated and combined financial
statements.
The
Partnership accrues for the cost of environmental liabilities when management
becomes aware that a liability is probable and is able to reasonably estimate
the probable exposure. Currently, the Partnership is not aware of any such
claims or contingent liabilities, which should be disclosed, or for which a
provision should be established in the accompanying consolidated financial
statements.
An
estimated loss from a contingency should be accrued by a charge to expense and a
liability recorded only if all of the following conditions are met:
|
●
|
Information
available prior to the issuance of the financial statement indicates that
it is probable that a liability has been incurred at the date of the
financial statements.
|
|
●
|
The
amount of the loss can be reasonably estimated.
|
|
●
|
The
amount is material.
|
|
(a)
|
Lease
Commitments: The vessel-owning subsidiaries of the Partnership have
entered into time and bareboat charter agreements, which are summarized
below:
|
|
Vessel
Name
|
Time
Charter
(TC)/
Bare
Boat
Charter
(BC)
(Years)
|
Commencement
of Charter
|
Charterer
|
Profit
Sharing
(1)
|
Gross
Daily Hire Rate
(Without
Profit Sharing)
|
|
M/T
Atlantas
(M/T
British Ensign)
|
5+3
BC
|
04/2006
|
B.P.
Shipping Ltd
|
$15.2
(5y) &
$13.5
(3y)
|
|
|
M/T
Aktoras
(M/T
British Envoy)
|
5+3
BC
|
07/2006
|
B.P.
Shipping Ltd
|
$15.2
(5y) &
$13.5
(3y)
|
|
|
M/T
Agisilaos
|
2.5
+ 1.1 TC
|
08/2006
|
B.P.
Shipping Ltd
|
50/50
|
$17.7
(2.5y) &
$20.0
(1.1y)
|
|
M/T
Arionas
|
2.0
+ 0.5 + 1.1 TC
|
11/2006
|
B.P.
Shipping Ltd
|
50/50
|
$21.3
(2.0y),
$19.2
(0.5y) &
$20.0
(1.1y)
|
|
M/T
Aiolos
(M/T
British Emissary)
|
5+3
BC
|
03/2007
|
B.P.
Shipping Ltd
|
$15.2
(5y) &$13.5 (3y)
|
|
|
M/T
Avax
|
3
TC
|
06/2007
|
B.P.
Shipping Ltd
|
50/50
|
$20.8
|
|
M/T
Axios
|
3
TC
|
03/2007
|
B.P.
Shipping Ltd
|
50/50
|
$20.8
|
|
M/T
Assos (3)
|
3
TC
|
11/2006
|
Morgan
Stanley
|
50/50
|
$20.0
|
|
M/T
Atrotos (4)
|
3
TC
|
05/2007
|
Morgan
Stanley
|
50/50
|
$20.0
|
|
M/T
Akeraios
|
3
TC
|
07/2007
|
Morgan
Stanley
|
50/50
|
$20.0
|
|
M/T
Anemos I
|
3
TC
|
09/2007
|
Morgan
Stanley
|
50/50
|
$20.0
|
|
M/T
Apostolos
|
3
TC
|
09/2007
|
Morgan
Stanley
|
50/50
|
$20.0
|
|
M/T
Alexandros II
(M/T
Overseas Serifos)
|
10
BC
|
01/2008
|
Overseas
Shipholding Group Inc. (2)
|
$13.0
|
|
|
M/T
Aristotelis II
(M/T
Overseas Sifnos)
|
10
BC
|
06/2008
|
Overseas
Shipholding Group Inc. (2)
|
$13.0
|
|
|
M/T
Aris II
(M/T
Overseas Kimolos)
|
10
BC
|
08/2008
|
Overseas
Shipholding Group Inc. (2)
|
$13.0
|
|
|
M/T
Amore Mio II
|
3
TC
|
10/2007
|
B.P.
Shipping Ltd
|
50/50
|
$36.5
|
|
M/T
Aristofanis
|
4.8
TC
|
06/2005
|
Shell
International Trading & Shipping Company Limited
|
$13.3
|
|
|
M/T
Agamemnon II
|
3
TC
|
1/2009
|
B.P.
Shipping Ltd
|
50/50
(5)
|
$22.3
|
|
M/T
Ayrton II
|
2
TC
|
4/2009
|
B.P.
Shipping Ltd
|
50/50
(5)
|
$22.3
|
F-31
13. Commitments
and Contingencies – Continued
(a) Lease
Commitments - Continued
|
(1)
|
Profit
sharing refers to an arrangement between vessel-owning companies and
charterers to share a predetermined percentage voyage profit in excess of
the basic rate.
|
|
(2)
|
Overseas
Shipholding Group Inc. has an option to purchase each of the three STX
vessels delivered or to be delivered in 2008 at the end of the eighth,
ninth or tenth year of the charter, for $38.0 million,
$35.5 million and $33.0 million, respectively, which option is
exercisable six months before the date of completion of the eighth, ninth
or tenth year of the charter. The expiration date above may therefore
change depending on whether the charterer exercises its purchase
option.
|
|
(3)
|
The
vessel-owning company of the M/T Assos was substituted on April 7, 2009 by
the vessel-owning company of the M/T Agamemnon II (Note 1). The charter of
the M/T Assos with Morgan Stanley was terminated on April 5,
2009.
|
|
(4)
|
The
vessel-owning company of the M/T Atrotos was substituted on April 13, 2009
by the vessel-owning company of the M/T Ayrton II (Note 1). The charter of
the M/T Atrotos with Morgan Stanley was terminated on April 11,
2009.
|
|
(5)
|
50/50
profit share for breaching IWL (Institute Warranty Limits -- applies to
voyages to certain ports at certain periods of the
year).
|
Future
minimum rental receipts, excluding any profit share revenue that may arise,
based on non-cancelable long-term time and bareboat charter contracts, as of
December 31, 2009 were:
|
Year
ended
December
31,
|
Amount
|
|||
|
2010
|
$ | 60,438 | ||
|
2011
|
40,384 | |||
|
2012
|
29,202 | |||
|
2013
|
29,018 | |||
|
2014
|
23,334 | |||
|
Thereafter
|
19,452 | |||
|
Total
|
$ | 201,828 | ||
14. Subsequent
Events
|
|
We
have evaluated subsequent events through February 4, 2010, the
date the financial statements are
issued.
|
|
(a)
|
Dividends:
On January 29, 2010 the Partnership’s board of directors declared a cash
distribution of $0.41 per unit, which will be paid on February 17, 2010,
to unitholders of record on February 8,
2010.
|
F-32