UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________________
FORM 20-F
(Mark
One)
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o
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
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, 2008
OR
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o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
OR
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o SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Date of
event requiring this shell company report:
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)
_________________________
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each
class Name of each exchange
on which registered
Common
units representing limited partnership
interests Nasdaq Global
Market
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 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):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark which financial statements item the registrant has elected to
follow.
ITEM
17 o
ITEM 18 x
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.
___________
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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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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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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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;
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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 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;
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obtaining
tanker projects that we or Capital Maritime bid
on;
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timely
purchases and deliveries of newbuilding
vessels;
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our ability to compete
successfully for future chartering and newbuilding
opportunities;
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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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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 refined product shipping sector in general and the demand
for our medium range vessels in
particular;
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our ability
to retain key employees;
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customers’
increasing emphasis on environmental and safety
concerns;
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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 “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 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.
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Not
Applicable.
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Not
Applicable.
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Key
Information.
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Selected
Financial Data
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We have
derived the following selected historical financial and other data for the three
years ending December 31, 2008, from our audited consolidated and
combined financial statements for the years ended December 31, 2008, 2007 and
2006 (the “Financial Statements”) respectively, appearing elsewhere in this
Annual Report. The historical financial data presented for the period from
August 27, 2003 (inception) to December 31, 2005 have been derived from audited
financial statements not required to be included herein and are provided for
comparison purposes only. August 27, 2003 refers to the incorporation date of
the vessel-owning subsidiary of the M/T Aktoras and is the earliest
incorporation date of any of our vessel-owning subsidiaries.
Our
historical results are not necessarily indicative of the results that may be
expected in the future. Specifically, our financial statements for the period
from August 27, 2003 (inception) to December 31, 2004, and for the years ended
December 31, 2005 and 2006, are not comparable to our Financial Statements for
the years ended December 31, 2007 and 2008. Our initial public offering on April
3, 2007, and certain other transactions that occurred during 2007 and 2008,
including the delivery or acquisition of ten additional 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 seven 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 periods
from August 27, 2003 (inception) to December 31, 2004 and 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 in
2008 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, 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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Period
from Aug. 27, 2003 (inception)
to Dec. 31, 2004
(1)
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Income
Statement Data:
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Revenues
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$131,514
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$86,545
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$24,605
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$6,671
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$-
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Expenses:
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Voyage
expenses (2)
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1,072
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3,553
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427
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555
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-
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Vessel
operating expenses—related party (3)
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25,552
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12,688
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1,124
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360
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-
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Vessel
operating expenses (3)
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3,560
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6,287
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5,721
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3,285
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51
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General
and administrative expenses
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2,817
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1,477
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-
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-
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Depreciation
and amortization
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25,031
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15,363
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3,772
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595
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Total
operating expenses
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58,032
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39,368
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11,044
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4,795
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51
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Operating
income (expense)
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73,482
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47,177
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13,561
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1,876
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(51)
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Interest
expense and finance costs
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(25,448)
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(13,121)
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(5,117)
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(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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1,283
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711
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13
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6
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Foreign
currency gain/(loss), net
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(54)
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(45)
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(63)
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18
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Net
income (loss)
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$49,263
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$30,959
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$8,394
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$1,247
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(51)
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Less:
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Net
(loss) / income attributable to CMTC operations:
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(1,504)
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9,388
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8,394
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1,247
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(51)
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Partnership’s
net income
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50,767
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21,571
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General
partner's interest in our net income
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2,473
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431
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Limited
partners' interest in our net income
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48,294
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21,140
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-
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Net
income allocable to limited partner per:
Common unit (basic and
diluted)
Subordinated
unit (basic and diluted)
Total
unit (basic and diluted)
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2.00
2.00
2.00
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1.11
0.70
0.95
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Weighted-average
units outstanding (basic and diluted):
Common units
Subordinated
units
Total units
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15,379,212
8,805,522
24,184,734
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13,512,500
8,805,522
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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$641,607
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$525,199
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$218,200
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$59,926
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$26,199
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Total
assets
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700,154
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556,991
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228,511
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61,692
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26,217
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Total
partners’ capital / stockholders’ equity
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172,175
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185,181
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51,907
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25,566
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20,107
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Number
of shares/units
Common
units
Subordinated
units
General
Partner units
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25,323,623
16,011,629
8,805,522
506,472
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22,773,492
13,512,500
8,805,522
455,470
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4,200
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4,200
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4,200
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-
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Dividends
declared per unit
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$1.62
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$0.75
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Cash
Flow Data:
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Net
cash provided by operating activities
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72,786
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53,014
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10,265
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2,219
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45
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Net
cash used in investing activities
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(203,269)
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(335,047)
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(162,047)
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(34,322)
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(26,199)
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Net
cash provided by financing activities
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153,713
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300,713
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153,014
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32,095
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26,169
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___________
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(1)
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The
amount of historical earnings per unit
for:
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a)
the period from August 27, 2003 (inception) to December 31,
2004,
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b)
the years ended December 31, 2005 and
2006,
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c)
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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d)
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, 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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Risk
Factors
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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
A
protracted global economic slowdown or recession could have a material adverse
effect on our business, financial position and results of
operations.
Oil has
been one of the world’s primary energy sources for a number of decades. Global
economic growth has been strong in recent years which has had a significant
impact on shipping demand. However, during the second half of 2008 we started to
experience 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. We expect
that a protracted economic downturn will adversely effect tanker rates over the
coming years as a number of oil consuming countries are either
already in or are entering a recession and the global economy is experiencing
the lowest growth rates observed over the last decades. This economic downturn
is expected to also sharply reduce the demand for oil and refined petroleum
products, and also potentially affect tanker demand and vessel values overall.
Even though our vessels are chartered under medium- or long-term charters, 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 pay dividends, as well as our future prospects and
ability to grow our fleet.
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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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
newbuildings 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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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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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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lower levels of demand for the
seaborne transportation of refined products and crude
oil;
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increases 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.
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 limited partnership on January 16, 2007. Only seven 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
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 of $5,500
per time chartered vessel ($8,500 for the M/T Amore Mio II), 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 on the Nasdaq
Global market on April 3, 2007 (the “IPO”) have all been contracted directly by
Capital Maritime and all costs for the construction and delivery of such vessels
have been 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 any additional vessels we acquire in the future
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 in the future, 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 February 28, 2009, we had taken
delivery of seven newbuildings and purchased three additional vessels from
Capital Maritime. We have financed the purchase of these 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, your 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 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 severe deterioration in the banking
and credit world 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, which
was amended on September 19, 2007 and June 11, 2008 (our “existing credit
facility”), and a further $350.0 million revolving credit facility on March 19,
2008 (our “new credit facility” and together with our “existing credit
facility”, our “credit facilities”). As of December 31, 2008, 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 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources—Borrowings—Revolving
Credit Facilities” below. 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, our 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 0.725 to
1.00 (which means that the fair market value of the vessels in our fleet
must equal 138% of the aggregate amount outstanding under each credit
facility).
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We are
also required to maintain an aggregate fair market value of our financed vessels
equal to 125% of the aggregate amount outstanding under each credit
facility.
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, 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 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.
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 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 equal to approximately 138% 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.
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 138% 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" below.
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,
2008, BP Shipping Limited and Morgan Stanley Capital Group Inc. accounted for
54% and 33% of our revenues, respectively. For the year ended December 31, 2007,
these customers accounted for 58% and 24% of our revenues, respectively. For the
year ended December 31, 2006, BP Shipping Limited, Canterbury Tankers Inc, Shell
International Trading & Shipping Company Ltd. and Morgan Stanley Capital
Group Inc. accounted for 42%, 20%, 20% and 18% of our revenues,
respectively. In March and April 2008, we took delivery of the M/T Amore Mio II
and the M/T Aristofanis, which are chartered to BP Shipping Limited and Shell
International Trading & Shipping Company Ltd., respectively, and in January,
June and August 2008 we took delivery of three newbuildings, the M/T Alexandros
II, the M/T Aristotelis II and the M/T Aris II, chartered to subsidiaries of
Overseas Shipholding Group Inc., increasing the number of our customers for 2008
to five. We could lose a customer or the benefits 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. We may also
in the future contract with Capital Maritime for it to have newbuildings
constructed on our behalf and to incur the construction-related financing. We
would purchase the vessels on or after delivery based on an agreed-upon
price.
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. 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 six 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 the six 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 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.
Terrorist
attacks, increased acts of piracy, hostilities or war could lead to further
economic instability, increased costs and disruption of our
business.
Terrorist
attacks, such as the attacks that occurred in the United States on September 11,
2001, the bombings in Spain on March 11, 2004, the bombings in London on July 7,
2005, increased acts of piracy and hijacking of vessels off the coast of Somalia
and the Gulf of Aden, the ongoing conflicts in Iraq and Afghanistan and other
current and future conflicts may adversely affect our business, operating
results, financial condition, ability to raise capital and future growth.
Continuing hostilities in the Middle East may lead to additional armed conflicts
or to further acts of terrorism and civil disturbance in the United States or
elsewhere, which may contribute further to economic instability and disruption
of oil production and distribution, which could result in reduced demand for our
services. If any of our vessels is hijacked it would adversely affect our
receipt of revenues as well as lead to increased costs in order to achieve the
release of the vessel.
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. Terrorist attacks, war 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, which would harm our cash flow and our
business.
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.
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.
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. 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, 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 OPA 90, relevant U.S. Coast Guard regulations, IMO
regulations, such as Annex IV and Annex VI to the International Convention for
the Prevention of Pollution from Ships (“MARPOL”), EU directives and other
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.
Further
legislation, or amendments to existing legislation, applicable to international
and national maritime trade is expected over the coming years in areas such as
ship recycling, sewage systems, emission control (including emissions of
greenhouse gases), ballast treatment and handling, etc. Currently, legislation
and regulations that would require more stringent controls of air emissions from
ocean-going vessels are pending at the federal and state level in the U.S. Such
legislation or regulations may require additional capital expenditures 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 are considering regulating the management of
ballast water to prevent the introduction of non-indigenous species considered
to be invasive. For example, 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
January 31, 2009, 17 states, representing about 15.35% of the world’s merchant
shipping tonnage, have ratified the BWM Convention. 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 new regulations regarding ballast water management which may come into
effect.
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. Furthermore, new environmental regulations are expected
to come into effect following the agreement and execution of a G8 environmental
agreement.
Additionally,
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.
We
have a limited history operating as a publicly traded entity.
We
completed our IPO on the Nasdaq Global Market on April 3, 2007 and have a
limited history operating as a publicly traded entity. 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 (“SOX 404”) requires
that we evaluate and determine the effectiveness of our internal control over
financial reporting on an annual 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 and will
continue to have to dedicate a significant amount of time and resources to
ensure compliance with the regulatory requirements of Section 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.
We have incurred and will continue to incur significant 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.
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.
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) generally will agree 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 will 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 and holders of subordinated units do
not elect any members of the board. We do not currently have any outstanding
subordinated units. 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 will 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.
Following
the early termination of the subordination period and the conversion of the
subordinated units to common on a one-for-one basis on February 14, 2008,
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. 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. Following the early termination of the subordination
period and the conversion of the subordinated units to common units on a
one-for-one basis, Capital Maritime 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.
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:
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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 such conversion, any shortfall in the payment of the
quarterly distribution was borne first by the owners of the subordinated units.
Following such conversion the risk will be borne by our common unitholders,
including Capital Maritime, equally.
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. Further to the above, Capital Maritime, which
holds 11,304,651 common units representing 45.6% of our common units and is our
largest unitholder, may propose amendments to the partnership agreement that may
favor its interests over yours and which may change or limit your rights under
the partnership agreement.
We
currently do not have any officers and expect to rely solely on officers of our
general partner, who face conflicts in the allocation of their time to our
business.
We do not
currently expect our board of directors to exercise its power to appoint
officers of Capital Product Partners L.P., and as a result, we expect 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, which Capital Ship Management will determine for
services provided to us and certain of our subsidiaries, will be substantial,
may fluctuate, and will reduce our cash available for distribution to you. Such
fees and cost reimbursements may increase as the vessel costs environment
increases and 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 extraordinary 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 extraordinary events
and insurance deductibles. For the year ended 31, December 2008, such fees amounted to
approximately $1.0 million. Such costs may further increase 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 may 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 February 28,
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. As of February 28, 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 your approval, which would dilute
your 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 the two
non-contracted vessels we acquired from Capital Maritime during the first half
of 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;
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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 you.
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. Our board of directors may also
establish reserves for distributions on any future subordinated units, but only
if those reserves will not prevent us from distributing the full quarterly
distribution, plus any arrearages, on the common units for the following four
quarters. We currently do not have any subordinated units outstanding. As
described above in “—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 you to sell your 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, you may be
required to sell your common units or subordinated units at an undesirable time
or price and may not receive any return on your investment. You may also incur a
tax liability upon a sale of your units.
As
a result of an exceptional dividend distribution of $1.05 per unit made on
February 13, 2009 to unitholders of record on February 10, 2009, and in
accordance with the terms of our partnership agreement, all of our outstanding
subordinated units were automatically converted into common units on a
one-for-one basis as of February 14, 2009. As of February 28, 2009 Capital
Maritime, an affiliate of our general partner, 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.
You
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, you could be held liable for our obligations to the same extent as a
general partner if you participate 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. Please read “The Partnership Agreement—Limited Liability” for a
discussion of the implications of the limitations on liability to a
unitholder.
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 Act, we may not make a
distribution to you 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 been organized as a limited partnership under the laws of the Republic 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 Delaware. The Marshall Islands Act also provides that it is
to be applied and construed to make it uniform with the 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 you 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 you believe
that your 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. Even if
you are successful in bringing an action of this kind there is 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.
holders.
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 if at least 75.0% of its gross income for any taxable year
consists of certain types of “passive income”, or 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. shareholders 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 shares
in the PFIC.
Based on
our current and projected method of operation we do not believe that we have
been a PFIC nor do we expect to become a PFIC with respect to any future taxable
year. We intend to
treat our income from time 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. 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. 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
Internal Revenue Code of 1986, as amended (the “Code”), 50% 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% 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. See “Item 10E: Taxation”.
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 and our general
partner swill be responsible for managing our business and affairs and has been
granted certain veto rights over decisions of our board of directors. 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% 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.
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 controlled affiliates will be
conducted and operated in a manner that minimizes income taxes imposed upon us
and these controlled affiliates or which 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 controlled affiliates 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
limited partnership incorporated as Capital Product Partners L.P. under the laws
of the Marshall Islands on January 16, 2007 by Capital Maritime, an
international shipping company with a long history of operating and investing in
the shipping markets. Our fleet currently consists of 18 double-hull, high
specification tankers including one of the largest Ice Class 1A medium range
(“MR”) product tanker fleets in the world based on number of vessels and
carrying capacity. We maintain our principal executive headquarters at 3
Iassonos Street, Piraeus, 18537 Greece and our telephone number is +30 210 4584
950.
On April
3, 2007, we completed our IPO of 13,512,500 common units at a price of $21.50
per unit. At the time of the IPO, Capital Maritime transferred all of the shares
of eight wholly owned subsidiaries, each of which owned a newly built, double
hull MR product tanker, to us and we entered into an agreement with Capital Ship
Management, a subsidiary of Capital Maritime, to provide management and
technical services in connection with these and future vessels. Since the IPO we
have taken delivery of seven newbuildings, which we had contracted to acquire at
the time of the IPO, and we have also acquired three additional, non-contracted,
vessels from Capital Maritime, greatly increasing the size of our fleet in terms
of both number of vessels and carrying capacity. The additional vessels were
purchased in part by issuing equity to Capital Maritime. Capital Maritime has
also granted us a right of first offer for any MR tankers in its fleet under
charter for two or more years, giving us the opportunity to purchase up to an
additional six vessels in the future. We intend to continue to
make strategic 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 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. Following such conversion, 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, Capital GP L.L.C. The common units
owned by Capital Maritime have the same rights as our other outstanding common
units.
B.
Business Overview
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 and 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
charter our vessels under medium to long-term time and bareboat charters (two to
10 years, with an average remaining term of approximately 4.3 years as of
February 28, 2009) to large charterers such as BP Shipping Limited, Morgan
Stanley Capital Group Inc., Trafigura Beheer B.V., Shell International
Trading & Shipping Company Ltd. and subsidiaries of Overseas Shipholding
Group Inc. All our charters provide for the receipt of a fixed base rate
for the life of the charter, and in the case of 10 of our 12 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
Notwithstanding the current severe
economic downturn the duration and long term effects of which it is
not possible to predict our primary business objective remains to increase
quarterly distributions per unit over time subject to shipping, charter and
financial market developments. In order to achieve this objective we execute the
following business strategies:
|
|
●
|
Maintain
and grow our cash flows. 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, which provides for a
fixed management fee for an initial term of approximately five years from
when we take delivery of each vessel and includes the expenses for its
next scheduled special or intermediate survey, as applicable, and related
drydocking, will provide a stable base of revenue and predictable expenses
that will result in stable cash flows in the medium to long-term. Subject
to prevailing shipping, charter and financial market conditions we may
make potential future acquisitions from Capital Maritime or third parties,
which could lead to the growth of our base
revenues.
|
|
|
●
|
Continue to
grow our fleet. Despite the severe deterioration
currently faced in the banking and credit worlds affecting liquidity, we
intend to continue to evaluate potential acquisitions of additional
vessels and to take advantage of our unique relationship with Capital
Maritime and, subject to prevailing shipping, charter and financial market
conditions, 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. Our board has determined, however, that in the
current market and financial conditions there are limited opportunities
for vessel acquisitions that our accretive to our unitholders. Since the
IPO, we have taken delivery of seven newbuildings and have also acquired
three additional vessels from Capital Maritime. Furthermore, pursuant to
our omnibus agreement with Capital Maritime, we have the opportunity to
purchase six sister vessels currently in Capital Maritime’s fleet, but
only in the event those vessels are fixed under medium to long-term
charters Capital Maritime also has a newbuilding program in place and 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.
|
|
|
●
|
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. Following our IPO, we have acquired three
non-contracted vessels from Capital Maritime which were under time
charters with Trafigura Beheer B.V., BP Shipping Limited and Shell
International Trading & Shipping Ltd. and have also delivered
three vessels to Overseas Shipholding
Group.
|
|
|
●
|
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:
|
|
●
|
Stable and
growing cash flows based on medium to long-term
charters. We believe that the medium-to long-term,
fixed-rate nature of our charters, our profit sharing arrangements and our
fixed-rate management agreement provide a stable base of revenues and
predictable expenses that result in stable cash flows. Our existing fleet
has experienced significant growth since our IPO, both in terms of
carrying capacity and number of vessels. In addition, the potential
opportunity to purchase up to an additional six sister vessels and a
number of modern crude and product double-hull tankers of various sizes
from Capital Maritime, subject to prevailing shipping, charter and
financial market conditions provides visible opportunity for future growth
in our revenue, operating income and net
income.
|
|
|
●
|
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 processes of some of the world’s most selective major
international oil companies, including BP p.l.c., Royal Dutch Shell plc,
StatoilHydro ASA, Chevron Corporation, ExxonMobil Corporation and Total
S.A. We believe we are well-positioned not only to retain existing
customers, such as BP Shipping Limited, Morgan Stanley Capital Group Inc.,
Trafigura Beheer B.V., Shell International Trading & Shipping Company
Ltd. and Overseas Shipholding Group Inc., but also to enter into
agreements with other large charterers and oil
companies.
|
|
|
●
|
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 fleet 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. In
addition, with an average age of approximately 3.0 years as of February
28, 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. At the time of the IPO
we entered into a non-amortizing revolving credit facility that provided
us with the funds to pay, in full or in part, the purchase price of the
pre-contracted vessels delivered to us to date, as well as the M/T
Attikos. On March 19, 2008 we entered into a new 10-year revolving credit
facility of up to $350.0 million, which is non-amortizing until March
2013, further enhancing our financial flexibility to realize new vessel
acquisitions from Capital Maritime and third parties. We may 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, all from
Capital Maritime. We currently have $246.0 million in undrawn amounts
available under our credit
facilities.
|
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 are:
|
|
●
|
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 26 countries and as of December 31, 2007, BP p.l.c.
had proved reserves of 17.8 billion barrels of oil and gas
equivalent. 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
September 30, 2008 Overseas Shipholding
Group Inc.’s operating fleet consisted of 158 vessels, 37 of which
were under construction, aggregating 15.8 million
dwt.
|
|
|
●
|
Trafigura Beheer
B.V., based in The
Netherlands and founded in 1993, is one of the world’s largest independent
oil traders with access to multi-billion credit facilities and investments
in industrial assets around the world of more than $700.0
million.
|
|
|
●
|
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.
|
BP
Shipping Limited and Morgan Stanley Capital Group Inc. accounted for 54% and 33%
of our revenues respectively for the year ended December 31, 2008. For the year
ended December 31, 2007, these customers accounted for 58% and 24% of our
revenues, respectively and for the year ended December 31, 2006 they accounted
for 42% and 18% 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 greatly increased in terms of both number
of vessels and carrying capacity and currently consists of 18 vessels
comprising:
|
|
●
|
Twelve
newly-built, Ice Class 1A, IMO II/III double-hull, MR
chemical/product tanker sister vessels ranging in size from 36,000 dwt to
48,000 dwt, constructed by Hyundai MIPO Dockyard Co., Ltd. to high
specifications, representing one of the largest such fleets in the world
based on number of vessels and carrying capacity and delivered to us
between April and September 2007;
|
|
|
●
|
Three
newly-built, 51,000 dwt, IMO II/III, double-hull, MR chemical/product
tanker sister vessels constructed by STX Shipbuilding Co., Ltd. under
bareboat charter to a charterer who has the option to purchase each vessel
at the end of the eighth, ninth or tenth year of each charter delivered to
us between January and August 2008;
|
|
|
●
|
Two
12,000 dwt, double-hull, small product tanker sister vessels purchased
from Capital Maritime in September 2007 and April 2008, respectively;
and
|
|
|
●
|
One
160,000 dwt, 2001-built, double-hull Suezmax tanker purchased from
Capital Maritime in March 2008.
|
As of
February 28, 2009, the average age of our fleet was approximately 3.0 years and
the average remaining term under our charters was approximately 4.3
years.
Sister
vessels are vessels of similar specifications and size typically built at the
same shipyard. All of the vessels are or were designed, constructed, inspected
and tested in accordance with the rules and regulations of either Det Norske
Veritas (“DNV”) or the American Bureau of Shipping (“ABS”) and are under
time or bareboat charters commencing at the time of their delivery.
Potential
Additional Vessels from Capital Maritime
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 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
giving us the opportunity to purchase up to an additional six vessels comprised
of two 37,000 dwt Ice Class 1A MR chemical/product tanker sister vessels and
four 51,000 dwt MR IMO II/III chemical/product tanker sister vessels in the
future. Capital Maritime is, however, under no obligation to fix any of these
vessels under charters of two or more years. The vessels are
currently under charter for less than two years or are yet to be chartered as
they are under construction. Please read "Item 7B: Related Party
Transactions" for a detailed description of our omnibus agreement with Capital
Maritime.
In
addition, Capital Maritime currently owns or has on order a number of
modern, double-hull
product and crude oil tankers of different sizes which we may potentially
acquire in the event those vessels were fixed under charters of two or more
years.
The table
below provides summary information as of February 28, 2009 about the vessels in
our fleet and the vessels we 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 approximate expected termination date
of the management agreement with Capital Ship Management with respect to each
vessel. Sister vessels are denoted by the same letter in the
tables.
OUR
FLEET
|
Vessel Name
|
Sister
Vessels (1)
|
Year
Built/ Delivery Date
|
DWT
|
OPEX
(per day)
|
Management
Agreement Expiration
|
Duration/
Charter
Type (2)
|
Expiry
of
Charter (3)
|
Daily
Charter
Rate (Net) (4)
|
Profit
Sharing
|
Charterer (5)
|
Description
|
|
VESSELS CURRENTLY IN OUR
FLEET
|
|||||||||||
|
Initial
Fleet – Delivered To Us At Time of the IPO
|
|||||||||||
|
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-Feb
2012
|
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)(10)
|
ü
|
BP
|
|
|
Axios
|
B
|
2007
|
47,872
|
$5,500
|
Dec-2011-Mar-2012
|
3-year
TC
|
Jan-2010
|
$20,500(8)
|
ü
|
BP
|
|
|
Avax
|
B
|
2007
|
47,834
|
$5,500
|
Jun
2010
|
3-year
TC
|
May-2010
|
$20,500
|
ü
|
BP
|
|
|
Assos
|
B
|
2006
|
47,872
|
$5,500
|
Feb-May
2011
|
3-year
TC
|
Oct-2009
|
$20,000
|
ü
|
MS
|
|
|
Total
DWT:
|
327,307
|
||||||||||
|
Vessels
Purchased from Capital Maritime since the IPO
|
|||||||||||
|
Atrotos
|
B
|
May-2007
|
47,786
|
$5,500
|
Feb-May
2012
|
3-year
TC
|
Apr-2010
|
$20,000
|
ü
|
MS
|
Ice
Class 1A IMO II/III Chemical/ Product
|
|
Akeraios
|
B
|
Jul-2007
|
47,781
|
$5,500
|
May-Aug
2012
|
3-year
TC
|
Jun-2010
|
$20,000
|
ü
|
MS
|
|
|
Anemos
I
|
B
|
Sept-2007
|
47,782
|
$5,500
|
Jul-Oct
2012
|
3-year
TC
|
Aug-2010
|
$20,000
|
ü
|
MS
|
|
|
Apostolos
|
B
|
Sept-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
|
2.2-2.3-yr
TC
|
Sept-2009
|
$13,503
|
Trafigura
|
Product
|
|
|
Alexandros
II (12)(13)
|
D
|
Jan-2008
|
51,258
|
$250
|
Dec-2012-Mar
2013
|
10-year
BC
|
Dec-2017
|
$13,000
|
OSG
|
IMO
II/III Chem./Prod.
|
|
|
Amore
Mio II (14)
|
-
|
2001
|
159,982
|
$8,500
|
Mar-Apr
2013
|
3-year
TC
|
Jan-2011
|
$36,000(8)
|
ü
|
BP
|
Crude
Oil
|
|
Aristofanis
(15)
|
C
|
2005
|
12,000
|
$5,500
|
Mar-Apr
2013
|
2-year
TC
|
Mar-2010
|
$12,952
|
Shell
|
Product
|
|
|
Aristotelis
II (12)(13)
|
D
|
Jun-2008
|
51,226
|
$250
|
Mar-Jun
2013
|
10-year
BC
|
May-2018
|
$13,000
|
OSG
|
IMO
II/III
|
|
|
Aris
II (12)(13)
|
D
|
Aug-2008
|
51,218
|
$250
|
May-Aug
2013
|
10-year
BC
|
Jul-2018
|
$13,000
|
OSG
|
Chem./Prod.
|
|
|
Total
Fleet DWT:
|
856,122
|
||||||||||
|
VESSELS WE MAY PURCHASE FROM CAPITAL
MARITIME
|
|||||||||||
|
May
Purchase if Under Long-Term Charter (With Expected Delivery Date to
Capital Maritime)
|
|||||||||||
|
Aristidis
|
A
|
Jan-2006
|
36,680
|
Ice
Class 1A IMO II/III Chem./ Prod.
|
|||||||
|
Alkiviadis
|
A
|
Mar-2006
|
36,721
|
||||||||
|
Agamemnon
II
|
D
|
Nov-2008
|
51,328
|
IMO
II/III Chemical/
Product
|
|||||||
|
Ayrton
III
|
D
|
Apr-2009
|
51,000
|
||||||||
|
Adonis
II
|
D
|
May-2009
|
51,000
|
||||||||
|
Asterix
II
|
D
|
June-2009
|
51,000
|
||||||||
|
Total
DWT:
|
277,729
|
||||||||||
__________
|
(1)
|
Sister
vessels, vessels of similar specifications and size typically built at the
same shipyard, are denoted in the tables by the same letter as follows:
(A), (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.
|
|
(2)
|
TC:
Time Charter, BC: Bareboat Charter.
|
|
(3)
|
Earliest
possible redelivery date. The charters for the M/T Attikos and the M/T
Aristofanis, expire on the date of expiration. The redelivery period for
the M/T Agisilaos is between March 1 and 29, 2010 and for the M/T Arionas
is between June 3 and 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 Trafigura time charter is
subject to 2.5% commissions. The Shell time charter is subject to 2.25%
commissions. With the exception of the M/T Assos, where 1.25% commission
is deducted from the gross profit share amount, 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. Trafigura:
Trafigura Beheer B.V. Shell: Shell International Trading &
Shipping Company Ltd.
|
|
(6)
|
For
the duration of the BC these vessels have been renamed: M/T Atlantas to
British Ensign, M/T Aktoras to British Envoy and M/T Aiolos to British
Emissary.
|
|
(7)
|
The
last three years of the BC will be at a daily charter rate of $13,433
(net).
|
|
(8)
|
In
addition to the commission on the gross charter rate, the ship broker is
entitled to an additional 1.25% commission on the amount of profit
share.
|
|
(9)
|
In
August 2008 the TC was extended by 13 months to March 2010. The net daily
charter rate prior to this extension was $17,500 and was subject to the
same 50/50 profit sharing
arrangement.
|
|
(10)
|
Effective
as of April 4, 2009. In August 2008 the TC was extended by 13 months to
June 2010. The net daily charter rate prior to the extension was $21,000
until November 2008 and $19,000 for the period from November 4, 2008 to
April 4, 2009 and was subject to the same 50/50 profit sharing
arrangement.
|
|
(11)
|
The
M/T Attikos was acquired by us in September
2007.
|
|
(12)
|
For
the duration of their charter they have been renamed: M/T
Alexandros II to Overseas Serifos, M/T Aristotelis II to Overseas Sifnos
and M/T Aris II to Overseas
Kimolos.
|
|
(13)
|
OSG
has an option to purchase each of these vessels at the end of the eighth,
ninth or tenth year of the applicable 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.
|
|
(14)
|
This
vessel was built by Daewoo Shipbuilding and Marine Engineering
Co., Ltd., South Korea and was acquired by us in March 2008.
|
|
(15)
|
The
M/T Aristofanis was acquired by us in April
2008.
|
Our
Charters
Currently,
all of the vessels in our fleet are under medium to long-term time or bareboat
charters with an average remaining term of approximately 4.3 years as of
February 28, 2009. Under certain circumstances we may operate vessels in the
spot market until the vessels have been fixed under appropriate medium to
long-term charters. 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 12 vessels under time charter of which five are with Morgan
Stanley Capital Group Inc., five with BP Shipping Limited and one each with
Trafigura Beheer B.V. and Shell International Trading & Shipping Company
Ltd. In August 2008 we reached an agreement with BP Shipping Limited to extend
the time charters for the M/T Agisilaos and the M/T Arionas by 13 months each
and amend the net daily charter rates. Of our 12 time charters, 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.
Further 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. With the exception of
the profit share arrangement for the M/T Assos, where 1.25% commission is
deducted from the gross profit share amount, 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. With the
exception of the M/T Amore Mio II, our profit sharing arrangements for our
vessels time chartered with BP Shipping Limited are based on the calculation of
the TCE according to the “last to next” principle. 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. 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. In the case of the M/T
Amore Mio II, the calculation of the profit share 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. The
profit share with BP Shipping Limited is calculated and settled quarterly,
except for the profit share for the M/T Amore Mio II, which is calculated and
settled monthly.
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.
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 provides, through its subsidiary Capital Ship Management, expertise in
various functions critical to our operations. This affords 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, we have 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 of $5,500 per vessel for our
time chartered vessels ($8,500 for the M/T Amore Mio II), for an initial term of
approximately five years from when we take delivery of each vessel and 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 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 extraordinary 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 extraordinary events and insurance deductibles. For the
year ended 31, December 2008, such fees amounted to approximately $1.0 million.
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 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 Lloyds Register of Shipping. 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 players in the oil trading business and the
industry is continuously consolidating. The so called “oil majors companies”,
such as ExxonMobil Corporation, BP p.l.c., Royal Dutch Shell plc, Chevron
Corporation, ConocoPhillips, 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.,
Royal Dutch Shell plc, StatoilHydro ASA, Chevron Corporation, ExxonMobil
Corporation 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
maintaining the class status, 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.
Intermediate Surveys, which
are extended surveys and are 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.
Class Renewal Surveys (also
known as special
surveys) 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 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.
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.
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, DNV and, in the case of the M/T Attikos
and M/T Aristofanis, China Classification Society. All of the
newbuildings we currently have on order and any other new and secondhand vessels
that we purchase must be certified prior to their delivery. If any vessel we
have contracted to purchase is not certified as “in class” on the date of
closing, we have no obligation to take delivery of the 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 could harm our business and financial condition.
We
currently carry “hull and machinery”, “increased value”, “protection and
indemnity” and “war risk” insurance coverage for each of our vessels to protect
against most of the accident-related risks involved in the conduct of our
business:
|
|
●
|
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.
|
|
|
●
|
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 other liabilities incurred while operating vessels,
including injury to the crew, third parties, cargo or third party property
loss for which the shipowner is responsible and pollution. The current
available amount of our coverage for pollution is $1.0 billion per
vessel per incident.
|
|
|
●
|
War Risks insurance
covers such items as piracy and
terrorism.
|
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 costs are regarded as
disproportionate to the benefit.
The
following table sets forth certain information regarding our insurance coverage
as of December 31, 2008.
|
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. 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. According to the Energy
Information Administration (the “EIA”), global oil product demand has been
revised downwards and is expected to decline by 1.6% in 2009 averaging at 84.3
mbd. The EIA expects 2010 oil demand to grow by 1.0% to 85.1 mbd. 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 or cancelling operating rates and by
reducing plans for certain investment expansion plans, including additional
refining capacity. The worldwide financial and economic downturn may 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 depends on price as well as on 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 oil majors 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. However, we believe the young age of our fleet which is
one of the youngest in the industry, the high specifications of our vessels,
including the ability of most of our vessels to transport refined oil products
and certain chemicals, and the fact that 16 of our 18 charter contracts will
expire on or after January 2010 (the date at which all single-hull tankers
are due to be phased out under IMO regulations) when the number of vessels
available for rehire will have decreased, position us well to recharter our
vessels. In addition, 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., Royal Dutch Shell plc, StatoilHydro ASA, Chevron Corporation,
ExxonMobil Corporation and Total S.A. We believe our ability
to comply with the rigorous and comprehensive standards of major oil companies
relative to less qualified or experienced operators allows us to compete
effectively for new charters.
Regulation
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General
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Our
operations and our status as an operator and manager of ships are significantly
regulated by international conventions, (i.e. SOLAS, MARPOL), 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.
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United
States Requirements
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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. OPA 90 limits liability to the greater of $1,900
per gross ton or $16.0 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 of $2,200 per gross ton for tankers, combining the previous
OPA 90 limitation of liability of $1,900 per gross ton with the CERCLA liability
of $300 per gross ton. Under the regulations, owners or operators of fleets of
vessels are required to demonstrate evidence of financial responsibility for
each covered tanker up to 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”) had exempted the
discharge of ballast water and other substances incidental to the normal
operation of vessels in U.S. ports from Clean Water Act permitting requirements.
However, on March 30, 2005, a U.S. District Court ruled that the EPA exceeded
its authority in creating an exemption for ballast water. On September 18, 2006,
the court issued an order invalidating the exemption in the EPA’s regulations
for all discharges incidental to the normal operation of a vessel as of
September 30, 2008, and directing the EPA to develop a system for regulating all
discharges from vessels by that date. The District Court's decision was affirmed
by the Ninth Circuit Court of Appeals on July 23, 2008.
In June 2008, the EPA proposed rules governing the regulation of ballast water
discharges and other discharges incidental to the normal operation of
vessels. Under the proposed rules, commercial vessels would be
required to obtain a Clean Water Act permit regulating such discharges. The
permit, which was finalized by the EPA in December 2008, incorporates current
U.S. Coast Guard requirements for ballast water management as well as
supplemental ballast water requirements, and provides 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. 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 requires the EPA to
promulgate standards applicable to emissions of volatile organic compounds and
other air contaminants. In December 2007, the EPA issued an Advance Notice of
Proposed Rulemaking indicating its plan to propose more stringent federal
emission standards for new Category 3 marine diesel engines. The standards under
consideration are consistent with the 2008 Amendments to Annex VI of MARPOL, as
discussed herein. The 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. New or more stringent federal or state air emission regulations could
require significant capital expenditures to retrofit vessels and could otherwise
increase our operating costs.
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International
Requirements
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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. 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.
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 $6.7 million plus $940.0 for each
additional gross ton over 5,000. For vessels of over 140,000 gross tons,
liability will be limited to approximately $134.0 million. As the
convention calculates liability in terms of a basket of currencies, these
figures are based on currency exchange rates on January 30, 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.
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.
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Greenhouse
Gas Regulation
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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, the European Union 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 California
Attorney General and a coalition of environmental groups in October 2007
petitioned the EPA to regulate greenhouse gas emissions from ocean-going vessels
under the U.S. Clean Air Act. Any passage of climate control legislation or
other regulatory initiatives by the IMO, European Union or individual 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.
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Vessel
Security Regulations
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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, 2008.
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, 2008, 2007 and 2006 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 3.0 years as of February 28, 2009.
Eight of our vessels were transferred to us by Capital Maritime at the time of
our IPO in April 2007. Concurrently with the IPO, we also agreed to purchase an
additional seven newbuildings from Capital Maritime at fixed prices which were
delivered during 2007 and 2008. We have also acquired three additional vessels
from Capital Maritime which we had not agreed to purchase at the time of our
IPO. Two of these vessels were purchased in part by issuing equity to
Capital Maritime. As
of February 28, 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 severe economic downturn the duration and long term effects of which
it is not possible to predict, our primary business objective remains to provide
our unitholders with steadily rising distributions per unit over the long-term,
subject to shipping, charter and financial market developments. Our growth
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, will provide
us with a strong base of stable cash flows in the medium term. We intend to continue to
make strategic acquisitions 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 also read “—Factors
Affecting our Future Results of Operations” below.
Our Initial Public Offering
On April 3, 2007, we completed our IPO
on the Nasdaq Global Market of 13,512,500 common units at a price of $21.50 per
unit which included 1,762,500 common units issued to the underwriters in
connection with the exercise of their over-allotment option. In connection wit
the IPO 8,805,522 subordinated units were
issued to Capital Maritime and 455,470 general partner units were issued to Capital
GP L.L.C., our general partner, a wholly owned subsidiary of Capital
Maritime. The net
proceeds from the IPO were approximately $270.5 million, including the proceeds
from the exercise of the over-allotment option by the underwriters. 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 vessels to us. Capital
Maritime also paid the offering expenses, underwriting discounts, selling
commissions and brokerage fees incurred in connection with the IPO. As of
December 31, 2007, Capital Maritime owned a 40.7% interest in us, including a 2%
interest through its ownership of our general partner. For the year ended
December 31, 2008, Capital Maritime owned a 46.6% interest in us, including a 2%
interest through its ownership of our general partner.
Non-Contracted
Vessel Acquisitions
In March
and April 2008 we purchased the M/T Amore Mio II, a 160,000 dwt, 2001
built tanker, and the M/T Aristofanis, 12,000 dwt, 2005 built product tanker
sister vessel to the M/T Attikos, 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 $22.94 per unit, which was the
weighted average unit price for the period from October 15, 2007 to February 15,
2008, and the remainder through the incurrence of $57.5 million of debt under
our new credit facility and $2.0 million in cash. We had previously acquired the
M/T Attikos, a 12,000 dwt, 2005 built product tanker, in September 2007 from
Capital Maritime at a purchase price of $23.0 million. Please see “Item 4B:
Business Overview—Our Fleet” for more information regarding the charters and
counterparties associated with these vessels, “Item 7B: Related Party
Transactions” for a description of the terms of such purchases and “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 these acquisitions, including a detailed explanation of how they were
accounted for. These
transactions were unanimously approved by our board of directors following
approval by the conflicts committee of independent directors. Following these
acquisitions Capital Maritime owned a 46.6% interest in us, including its 2%
interest through its ownership of our general partner.
Registration
Statement on Form F-3
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 8,805,522 common units issuable upon
conversion of the subordinated units). On February 14, 2009, the 8,805,522
subordinated units converted on a one-for-one basis to common units in
accordance with the terms of our partnership agreement. To date, no securities
have been offered under the shelf registration process.
Early
Termination of Subordination – Conversion of Subordinated 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, 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 as of
February 14, 2009, 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. The common units owned by Capital Maritime have the same
rights as our other outstanding common units.
Potential
Additional Vessels
Pursuant to our omnibus agreement with
Capital Maritime, we have been granted a right of first offer for any MR tankers
in its fleet under charter for two or more years giving us the opportunity to
purchase up to an additional six vessels from Capital Maritime if they are fixed
under charters of two or more years. Capital Maritime also owns or has on order
a number of modern,
double-hull, product and crude oil tankers of different sizes which we
may potentially acquire in the event those vessels were fixed under charters of
two or more years. Furthermore, we will continue to evaluate opportunities to
acquire both newbuildings and second-hand vessels from Capital Maritime and from
third parties as we seek to grow our fleet. Please see “Item 7B: Related Party
Transactions” for a detailed description of our omnibus agreement with Capital
Maritime.
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, all of the
vessels in our fleet are under medium to long-term time or bareboat charters
with an average remaining term of approximately 4.3 years as of February 28,
2009. For the year ending December 31, 2009, 97% of our charter revenues are
fixed with only two of our 18 charter contracts scheduled to expire prior to
January 2010. In
addition, of our 12 time charters, 10 contain profit-sharing arrangements. We may in the future
operate vessels in the spot market until the vessels have been chartered under
appropriate medium to long-term charters.
All of
our vessels are under charter contracts with BP Shipping Limited, Morgan Stanley
Capital Group Inc., Trafigura Beheer B.V., Shell International Trading &
Shipping Company Ltd. and subsidiaries of Overseas Shipholding Group Inc. 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. For the year ended
December 31, 2007, these customers accounted for 58% and 24% of our revenues,
respectively. For the year ended December 31, 2006, BP Shipping Limited,
Canterbury Tankers Inc., Shell International Trading & Shipping Company Ltd,
and Morgan Stanley Capital Group Inc. accounted for 42%, 20%, 20% and 18% of our
revenues, respectively. 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 Deliveries 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 assets 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.
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.
Historical
Results of Operations
We commenced operations as an
independent entity on April 4, 2007, at which time Capital Maritime transferred
its interest in eight vessel-owning companies to us. Our historical results are
not necessarily indicative of the results that may be expected in the future.
Specifically, our Financial Statements for the year ended December 31, 2006 and
December 31, 2007, are not comparable. The completion of our IPO and certain
other transactions that occurred during 2007 and 2008, including the delivery
of seven newbuildings, the acquisition of the M/T Attikos, the M/T
Amore Mio II and the M/T Aristofanis, 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
financing and interest rate swap arrangements we entered into, have affected our
results of operations. Furthermore, for the year ended December 31, 2006, only
seven of the vessels in our current fleet had been delivered to Capital Maritime
and only two were in operation for the full year.
For more detail on the differences
between our historical results and expected future results, please read
“—Factors to Consider when Evaluating our Results” and “—Results of Operations”
below.
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
are currently facing a major global economic slowdown as well as a severe
deterioration in the banking and credit world which is expected to negatively
impact world trade and which may affect our ability to obtain financing as well
as the values of 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
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.
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Factors
to Consider When Evaluating Our
Results
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Our
historical results of operations and cash flows are not indicative of results of
operations and cash flows to be expected from any future period and our results
for the year ended December 31, 2006, are not readily comparable to the results
for the years ended December 31, 2007 and 2008. Specifically, it is important to
consider the following factors when evaluating our results of
operations:
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Financial Statements.
Our Financial Statements for the years ended December 31, 2008, 2007 and
2006 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 the M/T Attikos, the M/T Aristofanis and the M/T Amore Mio
II as if they were owned by us for the entire period from their delivery
to Capital Maritime on January 20, 2005, June 2, 2005 and July 31, 2007,
respectively.
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Limited Operations. The
results of operations and cash flows presented in our Financial Statements
for the years ended December 31, 2006 and 2007, reflect operations of the
vessels comprising our fleet as of December 31, 2008, which had been
delivered during the relevant year (seven for the year ended December 31,
2006 and 15 for the year ended December 31, 2007). The Financial
Statements for the year ended December 31, 2007 include operations of the
M/T Attikos, the M/T Aristofanis and the five vessels from our initial
fleet which had been delivered to Capital Maritime as of December 31,
2006. The remaining eight vessels which were acquired or delivered to us
or to Capital Maritime between January and September 2007, including the
M/T Amore Mio II, are included in
our results of operations and cash flows only from their respective
delivery dates. Our Financial Statements for the year ended December 31,
2006 include operations of five vessels which were in operation for only a
part of the reporting period and the M/T Attikos and M/T Aristofanis which
were in operation for the whole year. Please read “—Accounting for
Deliveries of Vessels” above for a description of the financial treatment
of vessel acquisitions.
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Different Sources of
Revenues. A portion of the revenues generated during the
year ended December 31, 2006 and for the period ended April 3, 2007
was derived from charters with different terms than the charters that are
currently in place.
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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 of $5,500 per vessel (except for the M/T
Amore Mio II for which we pay $8,500) 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 extraordinary 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 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.
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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. For the year
ended December 31, 2006, we did not incur any similar general and
administrative expenses.
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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.
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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, the M/T
Amore Mio II and the M/T Aristofanis, from Capital Maritime which we had
not contracted to purchase at the time of our IPO and we intend to
continue to make strategic acquisitions in a prudent manner that is
accretive to our distributable cash flow per
unit.
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Results
of Operations
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 the 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, 2007, have also been 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.
Revenues
Time and
bareboat charter revenues amounted to approximately $131.5 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
daily hire rates, 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. Excluding voyage expenses incurred by the three
non-contracted vessels (M/T Attikos, M/T Amore Mio II and M/T Aristofanis)
during the period they were part of Capital Maritime’s fleet, voyage expenses
for the year ended December 31, 2008 amounted to $0.9 million and consisted
primarily of commissions payable under our charter agreements, as compared to
$0.4 for the year ended 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., 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 $29.1 million, of which $25.6 million was paid to our manager and
include $1.0 million in extraordinary fees and costs relating to direct and
indirect expenses incurred by Capital Ship Management in the management of our
vessels, including, 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, 2007, vessel operating expenses amounted to
approximately $19.0 million, of which $12.7 million was paid to the
manager.
Vessel operating expenses for the year
ended December 31, 2008, represent management fees payable to Capital Ship
Management pursuant to our management agreement 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 represent management fees payable to Capital
Ship Management pursuant to our management agreement 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 consultancy fees,
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 $25.0 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
Income (Expense), Net
Other
income (expense), net for the year ended December 31, 2008, was
approximately $(24.2) 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 $(25.4) 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 $49.3 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.
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Our historical results of operations
and cash flows are not indicative of results of operations and cash flows to be
expected from any future period. Our results of operations and cash flows for
the year ended December 31, 2006, are not readily comparable to our results for
the year ended December 31, 2007. Our IPO on April 3, 2007, and certain other
transactions that occurred during 2007, including the delivery or acquisition of
additional 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, as at December 31, 2006, only seven of the vessels
in our current fleet had been delivered to Capital Maritime and only two were in
operation for the full year. For a general explanation as to why results of
operations for the year ended December 31, 2007 to the year ended December 31,
2006, are not comparable please also read “—Factors to Consider When Evaluating
Our Results” and “—Historical Results of Operations” above.
Revenues
Freight,
time and bareboat charter revenues amounted to approximately $86.5 million for
the year ended December 31, 2007, as compared to $24.6 million for the year
ended December 31, 2006 primarily due to the higher average number of
vessels in our fleet (11.6 in 2007 compared to 4.3 in 2006). The revenues for
the year ended December 31, 2007 have been retroactively adjusted and reflect
revenues from the M/T Amore Mio II, the M/T Aristofanis and the M/T Attikos for
the periods that they were part of Capital Maritime’s fleet prior to their
acquisition by us in March and April 2008, and September 2007,
respectively.
Voyage
Expenses
Voyage
expenses amounted to $3.6 million for the year ended December 31, 2007, as
compared to $0.4 million for the year ended December 31, 2006 primarily due
to the higher average number of vessels in our fleet.
Vessel
Operating Expenses
For the
year ended December 31, 2007, our vessel operating expenses amounted to
approximately $19.0 million, of which $12.7 million was paid to our
manager. For the
year ended December 31, 2006, vessel operating expenses amounted to
approximately $6.8 million, of which $1.1 million was paid to the
manager.
Vessel
operating expenses for the years ended December 31, 2007 and December 31, 2006
are not readily comparable. Vessel operating expenses for the year ended
December 31, 2007 represent fixed management fees payable to Capital Ship
Management pursuant to our management agreement, for 13 vessels and actual costs
incurred by eleven of these vessels for the period they were operated as part of
Capital Maritime’s fleet prior to their acquisition by us. Vessel operating
expenses for the year ended December 31, 2006 represent actual costs incurred by
seven vessels which were operated as part of Capital Maritime’s fleet for the
entire period.
General
and Administrative Expenses
General
and administrative expenses amounted to $1.5 million for the year ended December
31, 2007. General and administrative expenses include consultancy fees, board of
directors’ fees and expenses, audit fees, and other fees related to the expenses
of the publicly traded company. For the year ended December 31, 2006, we did not
incur any similar general and administrative expenses.
Depreciation
and Amortization
Depreciation
and amortization of fixed assets amounted to $15.4 million for the year ended
December 31, 2007 as compared to $3.8 million for the year ended
December 31, 2006 and is primarily due to the increased number of vessels
in our fleet.
This
amount primarily represents depreciation on seven vessels for the whole year and
on eight vessels for a part of the year commencing from their respective
delivery dates in 2007. The amount of depreciation for the year ended December
31, 2006 represents depreciation on two vessels for the whole year and on five
vessels for a part of the year commencing from their respective delivery dates
in 2006.
Other
Income (Expense), Net
Other
income (expense), net for the year ended December 31, 2007, was
approximately $(16.2) million as compared to $(5.2) million for the year
ended December 31, 2006.
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. The 2006 amount represents interest expense charged to
the vessel-owning companies and amortization of financing charges and bank
charges of $(5.1) million and $(0.1) million of foreign currency loss. Interest
expense for the period ending December 31, 2006, is not indicative of interest
expense to be expected for any future period, predominantly because the
historical bank debt bore interest at floating rates while, during 2007, we
entered into interest rate swap agreements to fix the LIBOR portion of our
interest rate in connection with the debt drawn down under our existing credit
facility.
Net
Income
Net
income for the year ended December 31, 2007, amounted to $31.0 million
as compared to $8.4 million for the year ended December 31, 2006. For an
explanation of why our historical net income is not indicative of net income to
be expected in future periods and why our results are not readily comparable,
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, 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. As at December 31, 2007, total cash and cash equivalents
were $19.9 million, there were no short term investments, restricted cash was
$3.3 million, and total liquidity including cash and undrawn long-term
borrowings was $118.7 million. The increase in total liquidity in 2008 as
compared to 2007 is primarily due to the significant increase in undrawn long
term borrowings as a result of us entering into a new $350.0 million credit
facility in March 2008 and the increased number of vessels in our fleet which
resulted in higher net income for the year ended December 31, 2008. As of
December 31, 2008, undrawn amounts under our credit facilities were $246.0
million compared to $95.5 million for the year ended December 31,
2007.
As at
December 31, 2006 total cash and cash equivalents were $1.2 million. This
increase in the year ended December 31, 2007 as compared to 2006 is primarily
due to the different financing arrangements in place prior to the IPO and the
increased number of vessels in our fleet.
We
anticipate that our primary sources of funds for our liquidity needs will be
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 acquisitions and expansion and
investment capital expenditures, including opportunities we may pursue under the
omnibus agreement with Capital Maritime or acquisitions from third parties. Following the completion
of our contracted acquisition program we do not currently have any future
commitments in place to acquire any vessels from Capital Maritime or a third
party.
As at
December 31, 2008, we had $246.0 million in undrawn amounts under our credit
facilities.
Total
Partners / Stockholders’ Equity as of December 31, 2008, amounted to $172.2
million, which reflects a reduction of $13.0 million from the year ended
December 31, 2007, as a result of the negative adjustment of the fair value of
our swaps which amounted to $33.4 million.
Notwithstanding
the current severe economic downturn the duration and long term effects of which
it is not possible to predict and subject to shipping, charter and financial
market developments, we believe that our working capital will be sufficient to
meet our existing liquidity needs for at least the next
12 months.
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Cash
Flows
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Our cash
flow statements:
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for
the year ended December 31, 2006, and for the period from January 1, 2007
to April 3, 2007, for the vessel-owning subsidiaries comprising our fleet
at the time of our IPO; and
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for
the period from January 1, 2007 to September 23, 2007, March 26, 2008 and
April 29, 2008 for the M/T Attikos, the M/T Amore Mio II and
the M/T Aristofanis, respectively,
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reflect
the operations of Capital Maritime, and include expenses incurred by Capital
Maritime while operating the vessels currently in our fleet, including expenses
associated with dry docking of the vessels, voyage expenses, repayment of loans
and the incurrence of indebtedness for the periods that our vessels were
operated as part of Capital Maritime’s fleet. Please read “—Factors to Consider
When Evaluating Our Results” above.
The
following table summarizes our cash and cash equivalents provided by (used in)
operating, financing and investing activities for the years presented in
millions:
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2008
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2007
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2006
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Net
Cash Provided by Operating Activities
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$ | 72.8 | $ | 53.0 | $ | 10.3 | ||||||
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Net
Cash Used in Investing Activities
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$ | (203.3 | ) | $ | (335.0 | ) | $ | (162.0 | ) | |||
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Net
Cash Provided by Financing Activities
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$ | 153.7 | $ | 300.7 | $ | 153.0 | ||||||
Net
Cash Provided by Operating Activities
Net cash
provided by operating activities increased to $72.8 million for the year
ended December 31, 2008 from $53.0 million for the year ended December
31, 2007 primarily due to an increase in net income due to the higher number of
average vessels in our fleet and the higher profit sharing revenues earned
during the year. The increase in net cash provided by operating activities for
the year ended December 31, 2007 as compared to the year ended December 31, 2006
is primarily due to the higher number of average vessels in our fleet and the
increase in hire received in advance from charterers in 2007 as compared to 2006
($8.6 million in 2007 as compared to $0.5 million in 2006). 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, 2008, net cash used was comprised of:
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$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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o
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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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o
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$21.6
million for the M/T Aristofanis reduced by $10.1 million 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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(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
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$1.2
million, representing the cost of the improvements for the M/T Aristofanis
paid by Capital Maritime.
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Of the remaining $2.4 million, $1.3
million represents restricted cash which is the minimum amount of free cash we
were required to maintain under our credit facilities for the period, and $1.1
million represents short term cash investments with original maturity from three
to twelve months.
For the
year ended December 31, 2007, $331.8 million of the net cash used was comprised
of:
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$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
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$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
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$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.
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The
remaining $3.2 million represents restricted cash, which is the minimum amount
of free cash we were required to maintain under our credit facilities for the
period.
For the
year ended December 31, 2006, $142.8 million related to the acquisition of
the five newbuildings delivered to Capital Maritime in this period that were
then transferred to us at the time of our IPO (the M/T Atlantas, the M/T
Aktoras, the M/T Agisilaos, the M/T Assos and the M/T Arionas). The remaining
$19.2 million related to advances toward the other three initial vessels:
the M/T Aiolos, the M/T Avax and the M/T Axios. For the year ended
December 31, 2006, there was no restricted cash.
Net
Cash Provided by Financing Activities
Net cash
provided by financing activities amounted to $153.7 million for the year ended
December 31, 2008, down from $300.7 million for the year ended
December 31, 2007. For the year ended December 31, 2006, net cash provided
by financing activities amounted to $153.0 million.
Proceeds
from the issuance of long-term debt amounted to $199.5 million for the year
ended December 31, 2008, down from $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. Proceeds for the year ended December 31, 2006 were $77.4
million.
Proceeds
from long-term debt due to related parties for the year ended December 31, 2008
were $60.5 million from credit facilities entered into by Capital Maritime as
compared to $109.7 million for the year ended December 31, 2007, which related
to credit facilities entered into by Capital Maritime to finance the
construction of the M/T Aiolos and the M/T Avax as well as the acquisition of
the M/T Amore Mio II in July 2007. Proceeds from long-term debt for the year
ended December 31, 2006 were $82.3 million.
Repayment
of debt amounted to $8.1 million for the year ended December 31, 2008, comprised
of the repayment of the M/T Aristofanis’ loan in April, 2008 by Capital
Maritime, down from $16.7 million for the year ended December 31, 2007,
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. For the year ended December 31,
2006, repayment of debt amounted to $22.2 million.
Repayment
of related party debt for the year ended December 31, 2008, amounted to $52.5
million and comprised of the repayment of the M/T Amore Mio II loan in March,
2008, by Capital Maritime, compared to $2.4 million for the year ended December
31, 2007 and $2.3 million for the year ended December 31, 2006. 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.
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.
There
were no net capital contributions for the year ended December 31, 2008 compared
to $31.3 million for the year ended December 31, 2007 of which $13.7 million
relate 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. Capital
contributions for the year ended December 31, 2006 were
$17.9 million.
During the year ended December 31,
2008, we made distributions to unitholders in an aggregate amount of $39.9
million reflecting distributions for the fourth quarter of 2007, and the first,
second and third quarters of 2008. 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 8B: Significant Changes”
below 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, 2008, long term debt was $474.0 million and the
current portion of long term debt was $0 as compared to $281.8 million and
$0.8 million,
respectively, for the period ended December 31, 2007. 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, 2008, both long-term
related party debt and current portion of related party debt were $0 as compared
to $63.0 million and $5.9 million, respectively, for the year ended
December 31, 2007.
Revolving Credit
Facilities
On March
19, 2008, we entered into a new 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 new credit facility is subject to similar covenants and
restrictions as those in our existing facility described below. 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.
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 on June 11,
2008 to, amongst others, amend the provisions relating to security offered under
the facility. As of December 31, 2008, 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. Please see Note 5 (Long-Term Debt) to
our Financial
Statements included herein for more information.
The financing
arrangements in place prior to our IPO 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, 2008, we had $246.0 million in undrawn amounts under our credit
facilities.
Borrowings under our
$370.0 million existing credit facility bear interest at a rate of 0.75% over
US$ LIBOR. 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. Borrowings under our $350.0 million
new credit facility bear interest at a rate of 1.1% per annum over US$ LIBOR. 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. In
addition, 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 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 March 2018.
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. Interest expenses for the three month
period ended March 31, 2009, have increased by 0.55297% under our existing
credit facility and by 0.3928%, 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 0.725 to 1.00 (which means that
the fair market value of the vessels in our fleet must equal 138% of the
aggregate amount outstanding under each credit facility).
As of
December 31, 2008 we were in compliance with all 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
|
Purchase
of Vessels Following the IPO
The table
below summarizes certain information with respect to the vessels we have
purchased from Capital Maritime in 2007 and 2008, including their purchase
prices and the date they were delivered to us.
|
Name of Vessel
|
Delivery Date
|
Expiration of Charter
|
Daily Charter Rate (Net)
|
OPEX
(per day)
|
Charterer (1)
|
Purchase Price
|
|
Atrotos
|
May
2007
|
April
2010
|
$20,000(2)
|
$5,500
|
MS
|
$56,000,000
|
|
Akeraios
|
July
2007
|
June
2010
|
$20,000(2)
|
$5,500
|
MS
|
$56,000,000
|
|
Anemos
I
|
September
2007
|
August
2010
|
$20,000(2)
|
$5,500
|
MS
|
$56,000,000
|
|
Apostolos
|
September
2007
|
August
2010
|
$20,000(2)
|
$5,500
|
MS
|
$56,000,000
|
|
Attikos
|
September
2007
|
September
2009
|
$13,504(3)
|
$5,500
|
Trafigura
|
$23,000,000
|
|
Alexandros
II
|
January
2008
|
December
2017
|
$13,000(4)
|
$250
|
OSG
|
$48,000,000
|
|
Amore
Mio II
|
March
2008
|
January
2011
|
$36,000(2)(3)
|
$8,500
|
BP
|
$85,739,320
(5)
|
|
Aristofanis
|
April
2008
|
March
2010
|
$12,952(3)
|
$5,500
|
Shell
|
$21,566,265
(5)
|
|
Aristotelis
II
|
June
2008
|
May
2018
|
$13,000(4)
|
$250
|
OSG
|
$48,000,000
|
|
Aris
II
|
August
2008
|
July
2018
|
$13,000(4)
|
$250
|
OSG
|
$48,000,000
|
___________
|
(1)
|
BP:
BP Shipping Limited. Morgan Stanley: Morgan Stanley Capital
Group Inc., OSG: certain subsidiaries of Overseas Shipholding
Group Inc. Trafigura: Trafigura Beheer B.V. Shell: Shell
International Trading & Shipping Company
Ltd.
|
|
(2)
|
Subject
to 50/50 profit sharing arrangement. Please read “Item 4B: Business
Overview—Time Charters—Profit Sharing” and “Item 4B: Business Overview—Our
Fleet” for more information on our profit sharing arrangements and
relevant commissions.
|
|
(3)
|
The
rates quoted above are the net rates after we have paid commissions on the
base rates. The rates for the M/T Attikos, the M/T Amore Mio II and the
M/T Aristofanis are subject to 2.5%, 1.25% and 2.25% commissions,
respectively.
|
|
(4)
|
Under
the charters with OSG for the three vessels delivered in 2008, OSG has an
option to purchase each vessel 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
respective charter. The expiration date above may therefore change
depending on whether the charterer exercises its purchase
option.
|
|
(5)
|
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 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 such acquisitions were
funded.
|
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, 2008 (in thousands of U.S. Dollars).
|
December 31,
|
||||||||||||||||||||||||||||
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
Long-term
Debt Obligations
|
$ | 0 | $ | 0 | $ | 0 | $ | 18,325 | $ | 44,713 | $ | 410,962 | $ | 474,000 | ||||||||||||||
|
Interest
Obligations (1) (2)
|
$ | 27,829 | $ | 27,206 | $ | 27,212 | $ | 27,151 | $ | 25,209 | $ | 69,223 | $ | 203,830 | ||||||||||||||
|
Total
|
$ | 27,829 | $ | 27,206 | $ | 27,212 | $ | 45,476 | $ | 69,922 | $ | 480,185 | $ | 677,830 | ||||||||||||||
____
|
(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)
|
Interest
expenses for the three month period ended March 31, 2009 has increased by
0.55297% under our existing credit facility and by 0.3928%, under new
credit facility, respectively, in accordance with the terms of each
facility and reflect the increase in funding costs announced by our banks
for this three-month period.
|
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. Both charter rates and newbuilding costs tend to
be cyclical in nature. We review vessels and equipment for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. If impairment indicators are present, we measure the
recoverability of an asset by comparing its carrying amount to future
undiscounted cash flows that the asset is expected to generate over its
remaining useful life. If we consider a vessel or equipment to be impaired, we
recognize impairment in an amount equal to the excess of the carrying value of
the asset over its fair market value. We evaluated all of our long-lived assets
at December 31, 2008, and determined that the undiscounted estimated future net
cash flows related to these assets continued to support their recorded values.
The estimates and assumptions regarding the undiscounted net cash flows require
considerable judgment and are based upon existing contracts, historical
experience, financial forecasts and industry trends and conditions. No
impairment loss was recorded for any of the periods presented in our Financial
Statements.
|
|
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 FASB 13
“Accounting for Leases”, paragraph 19b. We currently do not enter into spot
voyage arrangements with respect to any of our vessels but may do so in the
future. 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.
Interest
Rate Swap Agreements
We
designate our derivatives based upon the criteria established by SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”),
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities—An amendment of
SFAS 133 (“SFAS 138”) and SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (“SFAS 149”), 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.
As of
December 31, 2008 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 (Fair Value of
Financial Instruments) to our Financial Statements included herein for
more detailed
information.
Fair
Value of Financial Instruments
On
January 1, 2008, we adopted SFAS No. 157, Fair Value
Measurements, (“SFAS No. 157”) 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
SFAS No. 157 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
term scheduled to expire in 2011. Our initial Class II and Class III elected
directors will serve until our annual meetings of unitholders in 2009 and 2010,
respectively. 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 is in
our best interests taking into consideration the general economic conditions,
lack of any accretive acquisition targets, 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 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
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.
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.
|
Name
|
Age
|
Position
|
||
|
Evangelos
M. Marinakis (1)
|
41
|
Director
and Chairman of the Board
|
||
|
Ioannis
E. Lazaridis (1)
|
41
|
Chief
Executive Officer and Chief Financial Officer and
Director
|
||
|
Nikolaos
Syntychakis (1)
|
47
|
Director
|
||
|
Robert
Curt (2)
|
58
|
Director
(5)
|
||
|
Abel
Rasterhoff (3)
|
68
|
Director
(5)
|
||
|
Evangelos
G. Bairactaris (4)
|
38
|
Director
and Secretary
|
||
|
Keith
Forman (4)
|
50
|
Director
(5)
|
_______________
(1) Appointed
by our general partner (term expires in 2010).
|
(2)
|
Class
I director (term expires in 2011).
|
|
(3)
|
Appointed
as initial Class II director (term expires in
2009).
|
|
(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 S.A., a Greek company which is one the
largest coastal passenger and cargo transportation services company operating in
Greece. Mr. Bairactaris holds a degree in law from the Law School of the
Kapodistrian University of Athens in Greece.
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, 2008, our directors, excluding our chairman,
received an aggregate amount of $290,000 as compared to $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.
Employment
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 expect to 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 February 28, 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
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. Prior to this conversion our partners’ capital included 16,011,629 common
units, 8,805,522 subordinated units and 506,472 general partner units. Following this conversion,
our partners’ capital consisted of 24,817,151 common units, no
subordinated units and 506,472 general partner units.
The
following table sets forth as of February 28, 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 Common Units Prior to Termination of
Subordination
|
Percentage
of Total Common Units Following Termination of Subordination
|
|||
|
Name of Beneficial Owner
|
|||||
|
Capital
Maritime (1)(2)
|
11,304,651
|
15.6%
|
45.56%
|
||
|
All
executive officers and directors as a group (7 persons)
(2)
|
0
|
0%
|
0%
|
||
|
Eagle
Global Advisors LLC(3)
|
1,355,750
|
8.47%
|
5.46%
|
||
|
GPS
Partners LLC and Brett S. Messing (4)
|
1,222,136
|
7.63%
|
4.9%
|
||
|
Morgan
Stanley, Morgan Stanley Strategic Investments, Inc. (5)
|
1,174,166
|
7.3%
|
4.7%
|
||
|
OppenheimerFunds,
Inc. (6)
|
1,029,199
|
6.43%
|
4.15%
|
||
|
Kayne
Anderson Capital Advisors, L.P. and Richard A. Kayne (7)
|
925,852
|
5.78%
|
3.73%
|
__________________
|
(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. 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.
|
|
(3)
|
This
information is based on the Schedule 13G filed by this person with the SEC
on February 17, 2009.
|
|
(4)
|
This
information is based on the Schedule 13G filed by these parties with the
SEC on February 17, 2009. GPS
Partners LLC manages the assets of various advisory clients who have the
right to receive dividends from the units. Brett S. Messing as the
controlling person of GPS Partners LLC may direct the voting and
disposition of such shares.
|
|
(5)
|
This
information is based on the Schedule 13G filed by these parties with the
SEC on February 17, 2009. These units are owned, or may be deemed to be
beneficially owned, by Morgan Stanley Strategic Investments, Inc., a
wholly-owned subsidiary of Morgan
Stanley.
|
|
(6)
|
Includes
shared voting power and shared dispositive power as to 1,029,199 units
(with respect to Oppenheimer Funds, Inc.) a. Oppenheimer Funds,
Inc. is an investment adviser. This information is based on the Schedule
13G/A filed by this party with the SEC on January 26,
2009.
|
|
(7)
|
Includes
shared voting power and shared dispositive power as to 925,852 units.
Kayne Anderson Capital Advisors, L.P., is an investment adviser. Richard
A. Kayne, as the controlling shareholder of the corporate owner of Kayne
Anderson Investment Management, Inc., the general partner of Kayne
Anderson Capital Advisors, L.P. may direct voting or disposition of the
925,852 units. This information is based on the Schedule 13G filed by
these parties with the SEC on February 11,
2009.
|
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. As of
February 28, 2009, Capital Maritime owned common units representing a 44.6% interest in us and also
had a 2% general partner interest in us through its ownership of our general
partner, which gives it the ability to control the outcome of unitholder votes
on certain matters. 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 a 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 from January 1, 2008 to date
|
1.
|
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
LLC, whereby the general partner agrees to defer receipt of a portion of
the $12.5 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 has
agreed to receive the $12.5 million of incentive payments in four equal
quarterly installments, with the first installment having been paid on
February 13, 2009. Payment of each deferred quarterly installment is
subject to distribution of at least the minimum quarterly distribution and
any arrearages of minimum quarterly distributions for the relevant quarter
by us. These payments will be made from the operating surplus.
|
|
2.
|
Investor Relations Services
Agreement. Further to the provisions of the Administrative Services
Agreement entered into with Capital Ship Management and subject to its
terms we entered into a one-year Investor Relations Agreement dated
January 1, 2009 with Capital Ship Management to clarify the provisions
under which certain investor
relations and corporate support services to assist us in our
communications with holders of units representing limited partnership
interests in us shall be provided to us for a fixed monthly fee of $15,000
plus reimbursement of reasonable
expenses.
|
|
3.
|
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.
|
|
4.
|
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
$22.94 per unit, which was the weighted average unit price for the period
from October 15, 2007 to February 15, 2008, 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
these acquisitions, including a detailed explanation of how they were
accounted for.
|
|
5.
|
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.
|
|
6.
|
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.
|
|
7.
|
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 $22.94 per unit, which was the weighted
average unit price for the period from October 15, 2007 to February 15,
2008, 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
these acquisitions, including a detailed explanation of how they were
accounted for.
|
Transactions
entered into during the year ended December 31, 2007
|
8.
|
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:
|
|
|
a.
|
the
issuance to Capital Maritime of 11,750,000 common units and 8,805,522
subordinated units,
|
|
|
b.
|
the
payment to Capital Maritime of a cash dividend in the amount of $25.0
million at the closing of our IPO,
|
|
|
c.
|
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
|
|
|
d.
|
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.
|
|
9.
|
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.
|
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:
|
|
a.
|
acquiring,
owning, chartering or operating medium range tankers under charter for
less than two years;
|
|
|
b.
|
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;
|
|
|
c.
|
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:
|
|
|
i.
|
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.
|
|
|
ii.
|
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.
|
|
|
d.
|
acquiring
a non-controlling interest in any company, business or pool of
assets;
|
|
|
e.
|
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;
|
|
|
f.
|
providing
ship management services relating to any vessel whatsoever, including to
medium range tankers owned by the controlled affiliates of Capital
Maritime; or
|
|
|
g.
|
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.
|
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 have agreed, and have 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:
|
|
a.
|
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;
|
|
|
b.
|
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:
|
|
|
i.
|
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;
|
|
|
ii.
|
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.
|
|
|
c.
|
prevent
us from acquiring a non-controlling interest in any company, business or
pool of assets;
|
|
|
d.
|
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
|
|
|
e.
|
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.
|
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 have
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 has agreed (and has 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 will 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.
|
10.
|
Management Agreement.
We have 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.
|
|
|
a.
|
We
pay Capital Ship Management a fixed daily fee of $5,500 per time chartered
vessel ($8,500 for the M/T Amore Mio II) 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.
|
|
|
b.
|
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. With respect to each vessel that has been or will be
subsequently delivered the management agreement will have an initial term
of approximately five years from when we take delivery of each
vessel.
|
|
|
c.
|
In
addition to the fixed daily fees payable under the management agreement,
Capital Ship Management is entitled to supplementary remuneration for
extraordinary fees and costs of any direct and indirect expenses it
reasonably incurs in providing these services.
|
|
|
11.
|
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.
|
|
12.
|
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.
|
|
13.
|
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.
|
|
14.
|
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.
|
|
15.
|
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, is chartered to Trafigura Beheer B.V., 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.
|
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 $12.5
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 below
“Termination of the Subordination period” for more details regarding such
distributions and its 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:
|
|
●
|
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.
|
|
|
●
|
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%.
|
|
|
●
|
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.
|
|
|
●
|
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.
|
|
|
●
|
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.
|
|
|
●
|
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. Our
board has determined that in the current market and financial conditions there
is little opportunity for vessel acquisitions that our accretive to our
unitholders. 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***
|
||
|
___________
*
Prorated for the period from April 4, 2007 to June 30,
2007.
**Includes
$12.5 million with respect to incentive distribution rights held by our
general partner in accordance with the terms of our partnership agreement.
We anticipate
that starting with the first quarter of 2009 distributions will return to
levels more similar to those of prior periods.
***
Exceptional non-recurring cash
distribution.
|
||||
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 $12.5 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 will receive the $12.5 million of incentive payments in four equal
quarterly installments, with the first installment having been paid in February
2009. Payment of each deferred quarterly installment is subject to our
distributing at least the minimum quarterly distribution and any arrearages of
minimum quarterly distributions for the relevant quarter.
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 30, 2009 we declared an exceptional non-recurring cash
distribution of $1.05 per unit, which was paid on February 13, 2009, to
unitholder of record on February 10, 2009. This exceptional distribution
was funded from operating surplus and through a decrease in existing
reserves.
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|
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2.
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The
payment of this exceptional distribution also resulted in a distribution
of $12.5 million with respect to incentive distribution rights held by our
general partner, in accordance with the terms of the partnership
agreement. The general partner has agreed to defer receipt of a portion of
this payment and will receive the $12.5 million in four equal quarterly
installments, with the first installment having been paid in February
2009. Payment of each deferred quarterly installment is subject to our
distributing at least the minimum quarterly distribution and any
arrearages of minimum quarterly distributions for the relevant quarter.
These payments will be made from the operating
surplus.
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3.
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The
payment of this exceptional 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 automatic conversion
of the subordinated units into common units on a one-for-one basis. Under
the partnership agreement the subordination period would have ended in
April 2011, if we 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. Following the conversion of the
subordinated units into common units, our partners’ capital included
24,817,151 common units and 506,472 general partner
units.
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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.
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High
|
Low
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||
|
Year
Ended: December 31,
|
|||
|
2008
|
24.93
|
5.51
|
|
|
2007*
|
32.50
|
20.80
|
|
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Quarter
Ended:
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|||
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December
31, 2008
|
11.90
|
5.52
|
|
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September
30, 2008
|
20.50
|
5.51
|
|
|
June
30, 2008
|
22.07
|
18.40
|
|
|
March
31, 2008
|
24.93
|
16.35
|
|
|
December
31, 2007
|
27.75
|
20.80
|
|
|
September
30, 2007
|
32.50
|
23.33
|
|
|
June
30, 2007*
|
28.90
|
24.08
|
|
|
Month
Ended:
|
|||
|
February
28, 2009
|
10.79
|
6.35
|
|
|
January
31, 2009
|
10.50
|
7.30
|
|
|
December
31, 2008
|
8.58
|
6.02
|
|
|
November
30, 2008
|
11.90
|
5.52
|
|
|
October
31, 2008
|
11.81
|
6.00
|
|
|
September
30, 2008
|
16.33
|
5.51
|
|
|
_________________
*
Period commenced on March 30, 2007.
|
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 and a
summary of certain contract terms.
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●
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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 $12.5 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.
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●
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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 under the
terms of the relevant share purchase agreement with Capital Maritime. A
portion of the acquisition price was funded through the issuance of
501,308 common units to Capital Maritime at a price of $22.94 per unit and
the remainder through the issuance of $11.5 million of debt under our new
credit facility. 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
these acquisitions, including a detailed explanation of how they were
accounted for.
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●
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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 under the terms of the relevant share purchase agreement with
Capital Maritime. A portion of the acquisition price was funded through
the issuance of 2,048,823 common units to
Capital Maritime at a price of $22.94 per unit and the remainder through
the issuance of $46.0 million of debt under our new credit facility and
$2.0 million in cash. 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
these acquisitions, including a detailed explanation of how they were
accounted for.
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●
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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.
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●
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Revolving
Facility Agreement, dated March 19, 2008, for a new 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 1.1% 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 the new credit
facility.
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|
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●
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Revolving
Facility Agreement, dated March 22, 2007, as amended September 19, 2007
and June 11, 2008, 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 0.75%. 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.
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|
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●
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Omnibus
Agreement with Capital Maritime & Trading Corp., Capital GP LLC, our
general partner, and Capital Product Operating GP LLC dated April 3,
2007.
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●
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Management
Agreement with Capital Ship Management pursuant to which Capital Ship
Management shall provide commercial and technical management services to
us dated April 3, 2007, as amended on September 24, 2007 and March 27,
2008 to reflect the acquisitions of the M/T Attikos and the M/T Amore Mio
II, respectively.
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●
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Administrative
Services Agreement with Capital Ship Management pursuant to which Capital
Ship Management shall provide administrative support services to us dated
April 3, 2007.
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●
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Contribution
Agreement with Capital Maritime & Trading Corp., Capital GP LLC, our
general partner, and Capital Product Operating GP LLC pursuant to which
certain vessels were contributed to us at the time of our IPO dated April
3, 2007.
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●
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Share
Purchase Agreement with Capital Maritime to purchase its interest in the
subsidiaries that owned the seven vessels and related charters we agreed
to purchase from Capital Maritime at the time of our IPO dated April 3,
2007.
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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 securities. We are not aware of any limitations on
the right of non-resident or foreign owners to hold or vote our securities
imposed by the laws of the Republic of The Marshall Islands or our partnership
agreement.
E.
Taxation
Marshall
Islands Taxation
Because
we, our operating subsidiary and our controlled affiliates do not, and we do not
expect that we and our controlled affiliates will, conduct business or
operations in the Republic of The Marshall Islands, neither we nor our
controlled affiliates will be subject to income, capital gains, profits or other
taxation under current Marshall Islands law. As a result, distributions by our
operating subsidiary and our controlled affiliates to us will not be subject to
Marshall Islands taxation.
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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 as currently in effect on the date of this prospectus, Treasury
Regulations, and current administrative rulings and court decisions, 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 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)
or to 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, partnerships or their partners, or 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 Internal Revenue Service 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.
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|
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 are
subject to U.S. federal income tax on our income to the extent it is from U.S.
sources or otherwise is effectively connected with the conduct of a trade or
business in the United States as discussed below.
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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, unless the exemption from U.S. taxation under Section 883 of
the Code (or the “Section 883 Exemption”) applies.
|
|
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 taxes or 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
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:
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|
●
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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
|
|
|
●
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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, 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. These conclusions, however, are based upon
legal authorities which do not expressly contemplate an organization 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 will be responsible for managing our business and affairs and
has been grated 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.
Since our
units will only be 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.
Provided
our units are treated as representing more than 50.0% of our vote and value, we
believe we will meet the trading volume requirements described previously
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.
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
are limited to a 4.9% voting interest in us regardless of how many units are
held by that 5.0% unitholder. 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.
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|
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 gross U.S. Source International Transportation Income, without benefit of
deductions.
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|
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:
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|
●
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is an individual U.S. citizen or resident (as
determined for U.S. federal income tax purposes), 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, an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or 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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|
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●
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owns the units as a capital
asset, generally, for investment purposes,
and
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|
|
●
|
owns less than 10% of
our units for United States federal
income tax purposes.
|
|
|
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 (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 shares 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.
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|
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.
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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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●
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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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●
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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.
|
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 do not believe that we have
been a PFIC nor do we expect to become a PFIC with respect to any future taxable
year. 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 chartering activities of our wholly owned
subsidiaries should constitute 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. We
intend to treat our income from time chartering activities as
non-passive income, and the vessels engaged in those activities as non-passive
assets. 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 that
there is substantial legal authority supporting our position consisting of case
law and IRS pronouncements concerning the characterization of income derived
from time charters as services income for other tax purposes. However, in the
absence of any legal authority specifically relating to the statutory provisions
governing PFICs, the IRS or a court could disagree with this position. 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 we were to be treated as a PFIC for any taxable year, we would
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 percent 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:
|
|
●
|
the excess distribution or gain
would be allocated ratably over the Non-Electing Holder’s aggregate
holding period for the
units;
|
|
|
●
|
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
|
|
|
●
|
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.
|
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 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:
|
|
●
|
fails to provide an accurate
taxpayer identification
number;
|
|
|
●
|
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
|
|
|
●
|
in certain circumstances, fails
to comply with applicable certification
requirements.
|
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, 2008.
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,
2008, 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, 2008. 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 $370.0 million bears floating interest of
0.75% per annum over US$ LIBOR. Our $350.0 million new credit facility bears
floating interest of 1.10% per annum over US$ 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.
Interest expenses for the three month period ended March 31, 2009 has increased
by 0.55297% under our existing credit facility and by 0.3928%, 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, 2008 and December 31, 2007, 87%
and 82% 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 extraordinary fees
and costs we are obligated to pay to Capital Ship Management under our
management agreement, which amounted to approximately $1.0 million for the year
ended December 31, 2008, 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.
No
material modifications to the rights of security holders.
We
completed our IPO on April 3, 2007. We did not receive any proceeds from the
sale of our common units by Capital Maritime. Capital Maritime used the proceeds
from our IPO to repay the existing debt on the eight vessels that made up our
fleet at the time of our IPO. Capital Maritime also paid the offering expenses,
underwriting discounts, selling commissions and brokerage fees incurred in
connection with the IPO.
a.
Disclosure Controls and Procedures
As of
December 31, 2008, 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, 2008, 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, 2008.
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, 2008, 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 Controls
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, 2008, 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, 2008 of the Partnership and our report dated
March 26, 2009 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 portion of the combined financial statements
attributable to the period through April 4, 2007 from the separate records
maintained by Capital Maritime & Trading Corp., and (2) the preparation
of the portion of the combined financial statements attributable to the Ross
Shipmanagement Co., Baymont Enterprises Incorporated, and Forbes Maritime Co.,
prior to the vessel acquisition by the Partnership, from the separate records
maintained by Capital Maritime & Trading Corp.
/s/
Deloitte. Hadjipavlou, Sofianos, & Cambanis S.A.
March 26, 2009
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.
Our
principal accountant for 2008 and 2007 was Deloitte. The following table shows
the fees we paid or accrued for audit services provided by Deloitte for 2008 and
2007 (in thousands of U.S. Dollars).
|
Fees
|
2008
|
2007
|
||
|
Audit
Fees (1)
|
$585
|
$227
|
||
|
Audit-Related
Fees
|
-
|
-
|
||
|
Tax Fees (2)
|
156
|
-
|
||
|
Total
|
$741
|
$227
|
|
|
(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. Fees in connection with the
review of our regulatory filings for our IPO of common units in April 2007
amounted to $1.0 million and were paid by Capital Maritime with part of
the proceeds from the IPO.
|
|
|
(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 2008
and 2007.
None.
On March
27, 2008, we issued 2,048,823 common units to Capital Maritime at a price of
$22.94 per unit, which was the weighted average unit price for the period from
October 15, 2007 to February 15, 2008, in order to finance a portion of the
acquisition price of the M/T Amore Mio II which we acquired from Capital
Maritime on the same date. 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 then
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.
On April
30, 2008, we issued 501,308 common units to Capital Maritime at a price of
$22.94 per unit, which was the weighted average unit price for the period from
October 15, 2007 to February 15, 2008, in order to finance a portion of the
acquisition price of the M/T Aristofanis which we acquired from Capital Maritime
on the same date. 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 then 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
these transactions, Capital Maritime owned 2,499,129 common units and 8,805,522
subordinated units, representing a 44.6% limited partner interest in us. In
addition, our general partner, which is owned and controlled by Capital
Maritime, owned a 2% general partner interest in us and all of the incentive
distribution rights.
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. 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, 2008 and
2007
|
F-2
|
|
Consolidated
and Combined Statements of Income for the years ended December 31, 2008,
2007 and 2006
|
F-3
|
|
Consolidated
and Combined Statement of Changes in Partners’/ Stockholders’ Equity for
the years ended December 31, 2008, 2007 and 2006
|
F-4
|
|
Consolidated
and Combined Statements of Cash Flows for the years ended December 31,
2008, 2007 and 2006
|
F-6
|
|
Notes
to the Consolidated and Combined Financial Statements
|
F-7
|
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
|
Certificate
of Formation of Capital GP L.L.C. (1)
|
|
|
1.4
|
Limited
Liability Company Agreement of Capital GP L.L.C. (1)
|
|
|
1.5
|
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
|
Amendment
to Revolving $370.0 million Credit Facility dated September 19, 2007
(3)
|
|
|
4.3
|
Supplemental
Agreement to Revolving $370.0 Million Credit Facility dated June 11, 2008
(4)
|
|
|
4.4
|
Omnibus
Agreement (1)
|
|
|
4.5
|
Management
Agreement with Capital Ship Management (1)
|
|
|
4.6
|
Amendment
1 to Management Agreement with Capital Ship Management dated
September 24, 2007 (3)
|
|
|
4.7
|
Amendment
2 to Management Agreement with Capital Ship Management dated
March 27, 2008 (3)
|
|
|
4.8
|
Amendment
3 to the Management Agreement with Capital Ship Management dated April 30,
2008 (4)
|
|
|
4.9
|
Administrative
Services Agreement with Capital Ship Management (1)
|
|
|
4.10
|
Contribution
and Conveyance Agreement for Initial Fleet (1)
|
|
|
4.11
|
Share
Purchase Agreement for 2007 and 2008 Vessels (1)
|
|
|
4.12
|
Revolving
$350.0 Million Credit Facility dated March 19,
2008 (3)
|
|
|
4.13
|
Share
Purchase Agreement for M/T Attikos dated September 24, 2007
(3)
|
|
|
4.14
|
Share
Purchase Agreement for M/T Amore Mio II dated March 27, 2008
(3)
|
|
|
4.15
|
Share
Purchase Agreement for M/T Aristofanis dated April 30, 2008
(4)
|
|
|
4.16
|
Capital
Product Partners L.P. 2008 Omnibus Incentive Compensation Plan dated April
29, 2008 (5)
|
|
|
4.17
|
Agreement
between Capital Product Partners and Capital GP LLC dated January 30,
2009
|
|
|
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.
|
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: March
27, 2009
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, 2008 and 2007, and
the related consolidated and combined statements of income, changes in
partners’/stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008. 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, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, 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.
Also as
discussed in Note 1 to the consolidated and combined financial statements,
through September 24, 2007, March 27, 2008, and April 30, 2008 the portion of
the accompanying combined financial statements attributable to Ross
Shipmanagement Co., Baymont Enterprises Incorporated, and Forbes Maritime Co.,
respectively, 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 Ross
Shipmanagement Co., Baymont Enterprise Incorporated, and Forbes Maritime Co. had
been operated as unaffiliated entities.
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, 2008, 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 March 26, 2009 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/
Deloitte. Hadjipavlou, Sofianos, & Cambanis S.A.
Athens,
Greece
March 26,
2009
Capital
Product Partners L.P.
Consolidated
and Combined Balance Sheets (Note 1)
(In
thousands of United States dollars, except number of shares)
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 43,149 | $ | 19,919 | ||||
|
Short
term investment
|
1,080 | - | ||||||
|
Trade
accounts receivable
|
6,420 | 2,600 | ||||||
|
Due
from related parties (Note 3)
|
- | 4,262 | ||||||
|
Prepayments
and other assets
|
571 | 410 | ||||||
|
Inventories
|
- | 320 | ||||||
|
Total
current assets
|
51,220 | 27,511 | ||||||
|
Fixed
assets
|
||||||||
|
Vessels,
net (Note 4)
|
641,607 | 525,199 | ||||||
|
Total
fixed assets
|
641,607 | 525,199 | ||||||
|
Other
non-current assets
|
||||||||
|
Deferred
charges, net
|
2,827 | 1,031 | ||||||
|
Restricted
cash (Notes 2, 5)
|
4,500 | 3,250 | ||||||
|
Total
non-current assets
|
648,934 | 529,480 | ||||||
|
Total
assets
|
$ | 700,154 | $ | 556,991 | ||||
|
Liabilities
and Partners’ / Stockholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
portion of long-term debt (Note 5)
|
$ | - | $ | 768 | ||||
|
Current
portion of related party long-term debt (Note
3)
|
- | 5,933 | ||||||
|
Trade
accounts payable
|
143 | 1,271 | ||||||
|
Due
to related parties (Note 3)
|
584 | 65 | ||||||
|
Accrued
liabilities (Note 7)
|
785 | 763 | ||||||
|
Deferred
revenue
|
3,485 | 3,473 | ||||||
|
Total
current liabilities
|
4,997 | 12,273 | ||||||
|
Long-term
liabilities
|
||||||||
|
Long-term
debt (Note 5)
|
474,000 | 281,812 | ||||||
|
Long-term
related party debt (Note 3)
|
- | 62,984 | ||||||
|
Deferred
revenue
|
1,568 | 690 | ||||||
|
Derivative
instruments (Notes 2, 6)
|
47,414 | 14,051 | ||||||
|
Total
long-term liabilities
|
522,982 | 359,537 | ||||||
|
Total
liabilities
|
527,979 | 371,810 | ||||||
|
Commitments
and contingencies (Note 13)
|
- | - | ||||||
|
Stockholders’
Equity
|
||||||||
|
Common
stock (par value $0; 1,000 shares issued and outstanding at December 31,
2007)
|
- | - | ||||||
|
Additional
paid in capital
|
- | 18,060 | ||||||
|
Retained
earnings
|
- | 5,182 | ||||||
|
Partners’
Equity
|
||||||||
|
General
Partner interest (2% interest)
|
5,773 | 3,444 | ||||||
|
Limited
Partners
|
||||||||
|
-
Common (16,011,629 and 13,512,500 units issued and outstanding at December
31, 2008 and 2007, respectively)
|
127,259 | 102,130 | ||||||
|
-
Subordinated (8,805,522 units issued and outstanding at December 31, 2008
and 2007)
|
82,794 | 66,653 | ||||||
|
Accumulated
other comprehensive loss (Notes 2, 6)
|
(43,651 | ) | (10,288 | ) | ||||
|
Total
partners’ / stockholders’ equity
|
172,175 | 185,181 | ||||||
|
Total
liabilities and partners’ / stockholders’ equity
|
$ | 700,154 | $ | 556,991 | ||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues
|
131,514 | 86,545 | 24,605 | |||||||||
|
Expenses:
|
||||||||||||
|
Voyage
expenses (Note 8)
|
1,072 | 3,553 | 427 | |||||||||
|
Vessel
operating expenses - related party (Notes 3, 8)
|
25,552 | 12,688 | 1,124 | |||||||||
|
Vessel
operating expenses (Note 8)
|
3,560 | 6,287 | 5,721 | |||||||||
|
General
and administrative expenses
|
2,817 | 1,477 | - | |||||||||
|
Depreciation
and amortization (Note 4)
|
25,031 | 15,363 | 3,772 | |||||||||
|
Operating
income
|
73,482 | 47,177 | 13,561 | |||||||||
|
Other
income (expense), net:
|
||||||||||||
|
Interest
expense and finance cost
|
(25,448 | ) | (13,121 | ) | (5,117 | ) | ||||||
|
Loss
on interest rate agreements
|
- | (3,763 | ) | - | ||||||||
|
Interest
income
|
1,283 | 711 | 13 | |||||||||
|
Foreign
currency (loss), net
|
(54 | ) | (45 | ) | (63 | ) | ||||||
|
Total
other (expense), net
|
(24,219 | ) | (16,218 | ) | (5,167 | ) | ||||||
|
Net
income
|
49,263 | 30,959 | 8,394 | |||||||||
|
Less:
|
||||||||||||
|
Net
(loss) / income attributable to CMTC operations
|
(1,504 | ) | 9,388 | 8,394 | ||||||||
|
Partnership’s
net income
|
50,767 | 21,571 | - | |||||||||
|
General
Partner’s interest in Partnership’s net income
|
$ | 2,473 | $ | 431 | $ | - | ||||||
|
Limited
Partners’ interest in Partnership’s net income
|
48,294 | 21,140 | - | |||||||||
|
Net
income per:
|
||||||||||||
|
● Common
units (basic and diluted)
|
2.00 | 1.11 | - | |||||||||
|
● Subordinated
units (basic and diluted)
|
2.00 | 0.70 | - | |||||||||
|
● Total
units (basic and diluted)
|
2.00 | 0.95 | - | |||||||||
|
Weighted-average
units outstanding:
|
||||||||||||
|
●
Common
units (basic and diluted)
|
15,379,212 | 13,512,500 | - | |||||||||
|
● Subordinated
units (basic and diluted)
|
8,805,522 | 8,805,522 | - | |||||||||
|
● Total
units (basic and diluted)
|
24,184,734 | 22,318,022 | - | |||||||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
|
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Changes in Partners’ / Stockholders’
Equity
(In
thousands of United States dollars)
|
||||||||||||||||||||||||||||||||
|
Partners’
Capital
|
||||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stockholders’
Equity
|
Common
|
Subordinated
|
General Partner
|
Total
|
Accumulated
Other Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
$ | - | $ | 25,566 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 25,566 | ||||||||||||||||
|
Capital
contribution by CMTC (Note 11)
|
- | 17,947 | - | - | - | - | - | 17,947 | ||||||||||||||||||||||||
|
Net
Income
|
8,394 | 8,394 | - | - | - | - | - | 8,394 | ||||||||||||||||||||||||
|
Comprehensive
income
|
8,394 | |||||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
51,907 | - | - | - | - | - | 51,907 | |||||||||||||||||||||||||
|
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
and 4)
|
- | (55,073 | ) | 162,214 | 105,863 | 5,471 | 273,548 | - | 218,475 | |||||||||||||||||||||||
|
Excess
of purchase price over acquired assets (Note 4)
|
- | - | (47,954 | ) | (31,295 | ) | (1,617 | ) | (80,866 | ) | - | (80,866 | ) | |||||||||||||||||||
|
Dividend
paid to CMTC (Note 1)
|
- | - | (14,825 | ) | (9,675 | ) | (500 | ) | (25,000 | ) | (25,000 | ) | ||||||||||||||||||||
|
Dividends
declared and paid to unitholders (Note 11)
|
- | - | (10,096 | ) | (6,589 | ) | (341 | ) | (17,026 | ) | - | (17,026 | ) | |||||||||||||||||||
|
Partnership
net income
|
21,571 | - | 12,791 | 8,349 | 431 | 21,571 | - | 21,571 | ||||||||||||||||||||||||
|
Capital
Product Partners L.P.
Consolidated
and Combined Statements of Changes in Partners’ / Stockholders’
Equity
(In
thousands of United States dollars)
|
||||||||||||||||||||||||||||||||
|
Partners’
Capital
|
||||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stockholders’
Equity
|
Common
|
Subordinated
|
General Partner
|
Total
|
Accumulated
Other Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||
|
· Unrealized
loss on derivative instruments
|
(10,288 | ) | - | - | - | - | - | (10,288 | ) | (10,288 | ) | |||||||||||||||||||||
|
Comprehensive
income
|
20,671 | |||||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
23,242 | 102,130 | 66,653 | 3,444 | 172,227 | (10,288 | ) | 185,181 | ||||||||||||||||||||||||
|
Dividends
declared and paid to unitholders (Note 11)
|
- | - | (24,871 | ) | (14,221 | ) | (798 | ) | (39,890 | ) | - | (39,890 | ) | |||||||||||||||||||
|
Net
loss attributable to CMTC
|
(1,504 | ) | (1,504 | ) | - | - | - | - | - | (1,504 | ) | |||||||||||||||||||||
|
Equity
of contributed companies retained by CMTC (Note 11)
|
- | (21,738 | ) | - | - | - | - | - | (21,738 | ) | ||||||||||||||||||||||
|
Issuance
of common units for vessels’ acquisitions (Notes 1, 4)
|
- | - | 28,686 | 18,163 | 956 | 47,805 | - | 47,805 | ||||||||||||||||||||||||
|
Excess
of purchase price over acquired assets (Note 4)
|
- | - | (9,397 | ) | (5,384 | ) | (302 | ) | (15,083 | ) | - | (15,083 | ) | |||||||||||||||||||
|
Partnership
net income
|
50,767 | - | 30,711 | 17,583 | 2,473 | 50,767 | - | 50,767 | ||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||
|
· Unrealized
loss on derivative instruments
|
(33,363 | ) | - | - | - | - | - | (33,363 | ) | (33,363 | ) | |||||||||||||||||||||
|
Comprehensive
income
|
15,900 | |||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
$ | - | $ | 127,259 | $ | 82,794 | $ | 5,773 | $ | 215,826 | $ | (43,651 | ) | $ | 172,175 | |||||||||||||||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 49,263 | $ | 30,959 | $ | 8,394 | ||||||
|
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
||||||||||||
|
Vessel
depreciation and amortization
|
25,031 | 15,271 | 3,772 | |||||||||
|
Amortization
of deferred charges
|
393 | 214 | 46 | |||||||||
|
Loss
on interest rate swap agreement
|
- | 3,763 | - | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Trade
accounts receivable
|
(4,857 | ) | (3,841 | ) | (760 | ) | ||||||
|
Insurance
claims
|
- | 5 | (72 | ) | ||||||||
|
Due
from related parties
|
(235 | ) | (4,842 | ) | (5,819 | ) | ||||||
|
Prepayments
and other assets
|
(514 | ) | (547 | ) | (161 | ) | ||||||
|
Inventories
|
177 | (344 | ) | (259 | ) | |||||||
|
Trade
accounts payable
|
736 | 1,787 | 1,493 | |||||||||
|
Due
to related parties
|
1,713 | 3,653 | 1,165 | |||||||||
|
Accrued
liabilities
|
440 | (695 | ) | 2,006 | ||||||||
|
Deferred
revenue
|
890 | 8,552 | 460 | |||||||||
|
Dry
docking expenses paid
|
(251 | ) | (921 | ) | - | |||||||
|
Net
cash provided by operating activities
|
72,786 | 53,014 | 10,265 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Vessel
acquisitions (Note 4)
|
(200,939 | ) | (331,797 | ) | (142,795 | ) | ||||||
|
Vessel
advances – new buildings
|
- | - | (19,252 | ) | ||||||||
|
Increase
of restricted cash
|
(1,250 | ) | (3,250 | ) | - | |||||||
|
Purchase
of short term investment
|
(1,080 | ) | - | - | ||||||||
|
Net
cash (used in) investing activities
|
(203,269 | ) | (335,047 | ) | (162,047 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of long-term debt
|
199,500 | 305,050 | 77,426 | |||||||||
|
Proceeds
from related party debt/financing
|
60,543 | 109,711 | 82,341 | |||||||||
|
Payments
of long-term debt
|
(8,080 | ) | (16,716 | ) | (22,161 | ) | ||||||
|
Payments
of related party debt/financing
|
(52,463 | ) | (2,376 | ) | (2,254 | ) | ||||||
|
Loan
issuance costs
|
(1,891 | ) | (1,092 | ) | (285 | ) | ||||||
|
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
|
(39,890 | ) | (42,026 | ) | - | |||||||
|
Cash
balance that was distributed to the previous owner
|
(2 | ) | (2,251 | ) | - | |||||||
|
Capital
contributions by CMTC
|
- | 31,279 | 17,947 | |||||||||
|
Net
cash provided by financing activities
|
153,713 | 300,713 | 153,014 | |||||||||
|
Net
increase in cash and cash equivalents
|
23,230 | 18,680 | 1,232 | |||||||||
|
Cash
and cash equivalents at beginning of period
|
19,919 | 1,239 | 7 | |||||||||
|
Cash
and cash equivalents at end of period
|
43,149 | $ | 19,919 | $ | 1,239 | |||||||
|
Supplemental
Cash Flow information
|
||||||||||||
|
Cash
paid for interest
|
$ | 18,163 | $ | 14,640 | $ | 5,220 | ||||||
|
Non-cash
Activities
|
||||||||||||
|
Net
liabilities assumed by CMTC upon vessel contribution to the Partnership
(Note 10)
|
213,743 | 74,239 | ||||||||||
|
Units
issued to acquire vessel owning company of M/T Amore Mio
II.
|
$ | 37,739 | ||||||||||
|
Units
issued to acquire vessel owning company of M/T
Aristofanis.
|
$ | 10,066 | ||||||||||
|
Change
in payable offering expenses
|
$ | 49 | ||||||||||
The
accompanying notes are an integral part of these consolidated and combined
financial statements.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
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
(Notes 2, 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.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
1.
|
Basis
of Presentation and General Information –
Continued
|
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 partial financing of the
acquisition cost of the shares of the vessel owning companies of the M/T Amore
Mio II, the M/T Aristofanis, and any further modern tanker (Note 5). As of
December 31, 2008, the Partnership had drawn down $107,500 and swapped the
interest portion for the same amount in order to reduce its exposure to interest
rate fluctuations (Notes 2, 6).
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.
Following
the guidance provided by the provision of EITF No. 87-21 “Change of Accounting
Basis in Master Limited Partnerships” the Initial Vessels were transferred to
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.
As
required by the provision of Statement of Financial Accounting Standards No.
141, “Business Combinations” (“SFAS No. 141”), the Partnership accounted for the
acquisition of the vessel owning company of the M/T Attikos, the M/T Amore Mio
II and the M/T Aristofanis (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)
of SFAS No. 141 explicitly do not apply; instead the method of accounting
prescribed by SFAS No. 141 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 (that is, 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’ equity.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
Basis
of Presentation and General Information – Continued
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.
Combined
information presented in these financial statements reflect 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 Partnerships’ balance sheets,
results of operations and cash flows are referred to as “consolidated” financial
statements.
The
consolidated and combined financial statements include the following vessel
owning companies and management company which were all incorporated 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)
|
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)
|
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
|
|
(1)
Initial Vessels
(2)
Committed Vessels
(3) Non
Contracted Vessels
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
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 2008 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 and combination. Intercompany 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, such expenses
have not incurred in the periods covered by the combined financial
statements.
|
|
(c)
|
Other
Comprehensive Income (Loss): The Partnership follows the provisions
of Statement of Financial Accounting Standards (“SFAS”) No. 130 “Statement
of Comprehensive Income” (SFAS 130) which requires separate presentation
of certain transactions, which are recorded directly as components of
partners’ / stockholders’ equity. For the years ended December 31, 2008
and 2007 the Partnership had accumulated other Comprehensive Loss of
$43,651 and $10,288 respectively, related to the change of the fair value
of derivatives that qualify for cash flow hedge
accounting.
|
|
(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.
|
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 agreement in
accordance with SFAS No. 13 “Accounting for Leases”, paragraph 19b. 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, 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 for
which the daily fixed fee is $8.5). The fee also includes expenses related to
the next scheduled special or intermediate survey as applicable and related
dry-docking for each vessel.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
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
extraordinary costs such as insurance deductibles, vetting, and repairs and
spares which relate to unforeseen and extraordinary events. For bareboat
chartered vessels, the bareboat charterer is responsible for vessel operating
expenses such as crewing, repairs and maintenance, insurance, stores, spares,
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 gains and
losses, 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
investment: Short term investment consists of cash time deposits
with original maturity of three to twelve months and amounted to $1,080
and $0 for the years ended December 31, 2008 and 2007
respectively.
|
|
(h)
|
Restricted
cash: In order for the Partnership to comply with the debt
covenants under its credit facility it must maintain minimum cash at the
bank available at all times. Such amount is considered by the Partnership
as restricted cash. As of December 31, 2008 and 2007 restricted cash
amounted to $4,500 and $3,250 respectively 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 at
December 31, 2008 and 2007
respectively.
|
|
(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.
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
2.
|
Significant
Accounting Policies – Continued
|
|
(l)
|
Impairment
of Long-lived Assets: The Partnership applies SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS
144”) which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 requires that
long-lived assets and certain identifiable intangibles held and used or
disposed of by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. An impairment loss for an asset held for use is
recognized when the estimate of undiscounted cash flows expected to be
generated by the use and eventual disposition of the asset is less than
its carrying amount. Measurement of the impairment loss is based on the
fair value of the asset. The Partnership regularly assesses whether
impairment indicators are present. The Partnership evaluated all of its
long-lived assets as at December 31, 2008, and determined that the
undiscounted estimated future net cash flows related to these assets
continued to support their recorded values. No impairment loss was
recorded for any of the periods
presented.
|
|
(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, 2008 British Petroleum
Shipping Limited and Morgan Stanley Capital Group Inc. accounted for 54%
and 33% of the 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 the total revenue, respectively.
For the year ended December 31, 2006, British Petroleum Shipping Limited,
Morgan Stanley Capital Group Inc., Canterbury Tankers Inc., and Shell
international Trading & Shipping Company Ltd. accounted for 42%, 18%,
20% and 20% of the 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 SFAS No. 157, Fair Value
Measurements, (“SFAS No. 157”) 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. The Partnership’s adoption of SFAS No. 157 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
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 recorded at fair value on the consolidated and
combined balance sheet.
|
|
(q)
|
Interest
Rate Swap Agreements: The Partnership designates its
derivatives based upon the criteria established by SFAS No. 133 Accounting
for derivative instruments and hedging activities which establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133, as amended by Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities—An amendment of SFAS 133, (SFAS
138) and Statement of Financial Accounting Standards No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, (SFAS 149), 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 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 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.
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
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 limited partners’ interest
in net income, less pro forma general partner incentive distributions
under EITF Issue No. 03-6, “Participating Securities and the Two — Class
Method Under FASB Statement No. 128”, or EITF 03-6, 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 common stock were exercised. The Partnership had no dilutive
securities outstanding during the year ended December 31, 2008 and
for the period from April 4, 2007 to December 31,
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
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value, with changes in fair value recognized in
earnings. SFAS No. 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. On January 01, 2008 the
Partnership did not make any fair value elections.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”). SFAS No. 141(R) supersedes SFAS No. 141 and 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 effective date of
this Statement is the same as that of the related FASB Statement No. 160, Non
controlling Interests in Consolidated Financial Statements, an amendment of ARB
No. 51” (“SFAS No. 160”). The Partnership is currently evaluating the
effect, if any; this statement may have on future financial
statements.
In
December 2007, the FASB issued SFAS No. 160. This Statement establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. The Partnership is currently evaluating the effect that this
statement may have on future financial statements.
In
February 2008, the FASB issued the FASB Staff Position (“FSP
No. 157-2”) which delays the effective date of SFAS 157, 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 FSP, 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 paragraph 6 of FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities.” This FSP defers the effective
date of SFAS 157 to fiscal years beginning after November 15, 2008, and the
interim periods within those fiscal years for items within the scope of this
FSP. The application of SFAS 157 in future periods to those items covered by FSP
157-2 is not expected to have a material effect on the Partnership’s
consolidated financial statements.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
2.
|
Significant
Accounting Policies – Continued
|
|
(u)
|
Recent
Accounting Pronouncements – Continued:
|
In
October 2008, the FASB issued the FASB Staff Position (“FSP
No. 157-3”) which clarifies the application of FASB Statement No. 157,
“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 FSP applies to
financial assets within the scope of accounting pronouncements that require or
permit fair value measurements in accordance with Statement 157. The FSP 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 (“FASB Statement No. 154 “Accounting changes and Error
Corrections”, paragraph 19). The disclosure provisions of Statement No. 154
for a change in accounting estimate are not required for revisions resulting
from a change in valuation technique or its application. The application of FSP
157-3 does not have a material effect on the Partnership’s consolidated
financial statements.
In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The 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 is currently evaluating the effect that this
statement may have on future financial statements.
In March
2008, the FASB ratified the EITF consensus on EITF Issue No. 07-4,
“Application of the Two-Class Method under FASB Statement No. 128, Earnings
per Share, to Master Limited Partnerships” (“EITF No. 07-4”), an update of
EITF No. 03-6, “Participating Securities and the Two-Class Method Under
FASB Statement No. 128” (“EITF No. 03-6”). EITF 07-4 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. EITF 07-4 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. EITF No. 07-4 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 evaluating the
potential impacts of EITF 07-4 and will adopt the provisions of this
guidance on January 1, 2009 and retrospectively apply the provisions to all
periods presented.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”), which identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with Generally Accepted Accounting Principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 became effective November 15,
2008, and did not have an impact on the Partnership’s consolidated financial
statements.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
3.
|
Transactions
with Related Parties
|
Since
April 4, 2007, the Partnership and its subsidiaries, have 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 for which the daily fixed fee is $8.5) and $0.3
for the time and bare boat chartered vessels respectively. 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 year ended December 31, 2008 were $24,305 and
are included in “Vessel operating expenses – related party” in the consolidated
income statement. For the period from April 4, 2007 to December 31, 2007 total
fees charged under the management agreement were $11,573.
According
to the terms of the management agreement, the Manager charged the Partnership
for extraordinary costs relating to insurances deductibles, vetting, and repairs
and spares which related to unforeseen and extraordinary events totaling an
amount of $1,002 for the year ended December 31, 2008. For the period from April
4, 2007 to December 31, 2007 the Manager did not charge the Partnership for such
costs.
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, and other administrative services. The Partnership
reimburses the Manager for reasonable costs and expenses incurred in connection
with the provision of these services within 15 days 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 year ended
December 31, 2008 the Manager invoiced the Partnership for such services for a
total amount of $110. For the period from April 4 to December 31, 2007 the
Manager did not charge any fees in connection with this agreement.
Pursuant
to the Partnership’s agreement, the Partnership reimburses the CGP for all
expenses which are necessary or appropriate for the conduct of the Partnership’s
business. During the year ended December 31, 2008 and for the period from April
4 to December 31, 2007 the Partnership incurred $824 and $559 of these costs,
respectively.
The
vessel owning companies of the Initial Vessels and the vessel owning companies
of M/T Attikos, M/T Amore Mio II and M/T Aristofanis 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.
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
3.
|
Transactions
with Related Parties – Continued
|
Balances
with related parties consisted of the following:
|
As
of
December
31, 2008
|
As
of
December
31, 2007
|
||||||||
|
I. Due
From:
|
|||||||||
|
Vessels’
operation (a)
|
$ | - | $ | 4,262 | |||||
|
Total
due from
|
$ | - | $ | 4,262 | |||||
|
II. Due
To:
|
|||||||||
|
CMTC
- loans current portion (b)
|
$ | - | $ | 5,933 | |||||
|
CMTC
- loans long-term portion (b)
|
- | 62,984 | |||||||
|
Manager
– payments on behalf of Capital Product Partners
L.P. (c)
|
584 | 28 | |||||||
|
Other
affiliated companies (d)
|
- | 37 | |||||||
|
Total
due to
|
$ | 584 | $ | 68,982 | |||||
|
|
(a)
|
Vessels’
Operation: The balance in
this line-item relates to funds that are received from charterers less
disbursements made by the Manager on behalf of the vessel-owning
subsidiaries. As of December 31, 2008 and 2007, this line item balance
amounted to $0 and $4,262
respectively.
|
|
|
(b)
|
CMTC
Loans: For the financing of the construction of the M/T Atlantas,
M/T Aktoras, M/T Aiolos, M/T Avax, M/T Assos, and the acquisition of M/T
Amore Mio II CMTC was the borrower under loan agreements with four
separate banks and the vessel-owning companies acted as guarantors under
these loans (related party loans). 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).
|
As of
December 31, 2008 and 2007, the balance of the related party loans was $0 and
$68,917 respectively.
A summary
of the CMTC loans is shown below:
|
Vessel
|
As
of
December
31, 2008
|
As
of
December
31, 2007
|
|||||||||
|
(i)
|
Issued
July 31, 2007 repaid by CMTC in March, 2008.
|
M/T
Amore Mio II
|
- | 68,917 | |||||||
|
Total
|
- | $ | 68,917 | ||||||||
|
Less:
Current portion
|
- | 5,933 | |||||||||
|
Long-term
portion
|
- | $ | 62,984 | ||||||||
|
|
The
related party loan bore interest at LIBOR plus a margin of 75 basis points
payable quarterly. The bank loan was 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. The weighted average interest rate for the related
party loans for years ended December 31, 2008, 2007 and 2006 was 4.06%,
5.81% and 6.18% respectively. Interest expense for the related party loans
for the years ended December 31, 2008, 2007 and 2006 amounted to $689,
$3,594 and $3,144 respectively.
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
3.
|
Transactions
with Related Parties – Continued
|
|
|
(b)
|
CMTC
Loans – Continued:
|
The loan
agreement 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. As of December 31, 2007, we were in compliance with all
debt covenants.
On March
20, 2008 the loan balance regarding the M/T Amore Mio II was settled by
CMTC.
|
|
(c)
|
Manager -
Payments on Behalf of Capital Product Partners L.P.: Following the IPO, the
Manager invoices the Partnership for payments that it makes on behalf of
the Partnership and its subsidiaries. The Partnership’s total outstanding
balance due to Manager as of December 31, 2008 and 2007 amounted to $584
and $28 respectively.
|
|
|
(d)
|
Other
Affiliated Companies: The balance in this line-item related to
funds advanced/received to/from entity under common
ownership.
|
|
4.
|
Vessels
|
An
analysis of vessels is as follows:
|
As
of
December
31, 2008
|
As
of
December
31, 2007
|
|||||||
|
Cost:
|
||||||||
|
Vessels
|
$ | 686,275 | $ | 544,836 | ||||
|
Total
cost
|
686,275 | 544,836 | ||||||
|
Accumulated
depreciation
|
(44,668 | ) | (19,637 | ) | ||||
|
Vessels,
net
|
$ | 641,607 | $ | 525,199 | ||||
All of
the Partnership’s vessels having total net book value of $641,607 as of December
31, 2008 have been provided as collateral to secure the Partnership’s two credit
facilities.
Capitalized
interest for the years ended December 31, 2008, 2007 and 2006 amounted to $0,
$223 and $1,455 respectively.
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 at the 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 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’ equity. Of the total excess,
the amount of $3,755 represents the cash purchase price in excess of CMTC’s
basis of the acquired vessels and is presented as a financing activity in the
statements of cash flows.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
4.
|
Vessels
– Continued
|
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’ equity 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.
|
5.
|
Long-Term
Debt
|
Long-term
debt consists of the following:
|
Bank
Loans
|
Entity
|
As
of
December
31, 2008
|
As
of
December
31,
2007
|
|||||||
|
(i)
|
Issued
in April, 2007 maturing
in June, 2017
|
Capital
Product Partners L.P.
|
$ | 366,500 | $ | 274,500 | ||||
|
(ii)
|
Issued
in March, 2008 maturing
in March 2018
|
Capital
Product Partners L.P.
|
107,500 | - | ||||||
|
(iii)
|
Issued
in June 2005 repaid
by CMTC in April 2008
|
Forbes
Maritime Co.
|
- | 8,080 | ||||||
|
Total
|
$ | 474,000 | $ | 282,580 | ||||||
|
Less:
Current portion
|
- | 768 | ||||||||
|
Long-term
portion
|
$ | 474,000 | $ | 281,812 | ||||||
On April
4, 2007, the M/T Arionas’, M/T Agisilaos’ and M/T Axios’ outstanding loan
balances, which amounted to $79,885, were settled in full by CMTC by the
offering proceeds (Note 1). Furthermore, on September 6, 2007, and April 29,
2008 the outstanding loan balances of M/T Attikos and M/T Aristofanis which
amounted to $7,000 and $8,080 were fully paid by CMTC. Interest expense for the
combined loans for the years ended December 31, 2008, 2007 and 2006 amounted to
$124, $1,856 and $1,915 respectively.
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 $370 million for the financing of the acquisition cost, or
part thereof, up to fifteen medium range product tankers. Borrowings under this
credit facility are jointly and severally secured by the vessel owning companies
of the fifteen vessels (Initial and Committed Vessels) and bears interest at a
rate of 0.75% per annum over US$ LIBOR. 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.
The
credit facility of up to $370,000 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.
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 $22,000 in order to partial finance the acquisition of the shares of the
vessel owning companies of the M/T Aristotelis II and M/T Aris II
respectively.
Borrowings
under this credit facility are jointly and severally secured by the vessel
owning companies of the collateral vessels and bear interest at a
rate of 1.10% per annum over US$ LIBOR. This credit facility 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.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
5.
|
Long-Term
Debt – Continued
|
The
Partnership’s drawn downs under its credit facilities are as
follows:
|
Vessel
/ Entity
|
Date
|
370,000Credit
Facility
|
350,000
Credit Facility
|
|
Capital
Product Partners L.P.
|
04/04/2007
|
$ 30,000
|
–
|
|
M/T
Atrotos
|
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
|
As of
December 31, 2008 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
year ended December 31, 2008 and for the period from April 4, 2007 to December
31, 2007 the Partnership recorded interest expense of $17,363 and $7,400,
respectively.
The
Partnerships 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. As of December 31, 2008. the Partnership did not incur
additional interest expense.
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 (Notes 2, 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
0.725:1. The credit facilities are also contain the collateral maintenance
requirement in which the aggregate average fair market value 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, 2008 and 2007 the Partnership was in compliance
with all debt covenants.
The
required annual loan payments to be made subsequent to December 31, 2008 are as
follows:
|
Bank
loans repayment schedule
|
|||
|
Years
ended December 31,
|
i
|
ii
|
Total
|
|
2009
|
–
|
–
|
–
|
|
2010
|
–
|
–
|
–
|
|
2011
|
–
|
–
|
–
|
|
2012
|
18,325
|
–
|
18,325
|
|
2013
|
36,650
|
8,063
|
44,713
|
|
Thereafter
|
311,525
|
99,437
|
410,962
|
|
Total
|
366,500
|
107,500
|
474,000
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
6.
|
Fair
Value of Financial Instruments
|
Derivative
Instruments
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.
The
Partnership follows SFAS No. 157, 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 statement 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 as defined in
SFAS 157 “Fair Value Measurements” 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.
As of
December 31, 2008, no fair value measurements for assets or liabilities under
Level 1 or Level 3 were recognized in the Partnership’s consolidated and
combined financial statements.
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, 2008 all of the Partnerships debt has been
swapped.
As of
December 31, 2008, 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,
2008
|
|
HSH
Nordbank AG
|
USD
|
30,000
|
5.1325%
|
02.20.2007
|
04.04.2007
|
06.29.2012
|
$ (3,199)
|
|
HSH
Nordbank AG
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
05.08.2007
|
06.29.2012
|
(5,972)
|
|
HSH
Nordbank AG
|
USD
|
56.000
|
5.1325%
|
02.20.2007
|
07.13.2007
|
06.29.2012
|
(5,972)
|
|
HSH
Nordbank AG
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
09.28.2007
|
06.29.2012
|
(5,972)
|
|
HSH
Nordbank AG
|
USD
|
56,000
|
5.1325%
|
02.20.2007
|
09.20.2007
|
06.29.2012
|
(5,972)
|
|
HSH
Nordbank AG
|
USD
|
24,000
|
5.1325%
|
02.20.2007
|
01.29.2008
|
06.29.2012
|
(2,560)
|
|
HSH
Nordbank AG
|
USD
|
24,000
|
5.1325%
|
02.20.2007
|
01.29.2008
|
06.29.2012
|
(2,560)
|
|
HSH
Nordbank AG
|
USD
|
24,000
|
5.1325%
|
02.20.2007
|
08.20.2008
|
06.29.2012
|
(2,560)
|
|
HSH
Nordbank AG
|
USD
|
20,500
|
4.9250%
|
09.20.2007
|
09.24.2007
|
06.29.2012
|
(2,040)
|
|
HSH
Nordbank AG
|
USD
|
46,000
|
3.5250%
|
03.25.2008
|
03.27.2008
|
03.27.2013
|
(2,971)
|
|
HSH
Nordbank AG
|
USD
|
11,500
|
3.8950%
|
04.24.2008
|
04.30.2008
|
03.28.2013
|
(919)
|
|
HSH
Nordbank AG
|
USD
|
20,000
|
4.5200%
|
06.13.2008
|
06.17.2008
|
06.28.2012
|
(1,713)
|
|
HSH
Nordbank AG
|
USD
|
28,000
|
4.6100%
|
06.13.2008
|
06.17.2008
|
03.28.2013
|
(3,062)
|
|
HSH
Nordbank AG
|
USD
|
22,000
|
4.0990%
|
08.14.2008
|
08.20.2008
|
03.28.2013
|
(1,942)
|
|
Total
derivative instruments fair value
|
$ (47,414)
|
||||||
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
7.
|
Accrued
Liabilities
|
Accrued
liabilities consist of the following:
|
As
of
December
31, 2008
|
As
of
December
31, 2007
|
|||||||
|
Accrued
loan interest and loan fees
|
$ | 108 | $ | 70 | ||||
|
Accrued
wages and crew expenses
|
- | 96 | ||||||
|
Accrued
other operating expenses
|
- | 39 | ||||||
|
Accrued
voyage expenses and commissions
|
212 | 471 | ||||||
|
Accrued
insurance expense
|
- | 24 | ||||||
|
Accrued
general and administrative expenses
|
465 | 63 | ||||||
|
Total
|
$ | 785 | $ | 763 | ||||
|
8.
|
Voyage
Expenses and Vessel Operating
Expenses
|
Voyage
expenses and vessel operating expenses consist of the following:
|
For
the years ended December 31,
|
||||||||||||
|
2008
(Note
1)
|
2007
(Note
1)
|
2006
(Note
1)
|
||||||||||
|
Voyage
expenses:
|
||||||||||||
|
Commissions
|
$ | 1,003 | $ | 1,010 | $ | 392 | ||||||
|
Port
expenses
|
1,192 | - | ||||||||||
|
Bunkers
|
69 | 1,276 | - | |||||||||
|
Other
|
75 | 35 | ||||||||||
|
Total
|
$ | 1,072 | $ | 3,553 | $ | 427 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Vessel
operating expenses
|
$ | 3,560 | $ | 6,287 | $ | 5,721 | ||||||
|
Vessel
operating expenses – related parties (Note 3)
|
25,552 | 12,688 | 1,124 | |||||||||
|
Total
|
$ | 29,112 | $ | 18,975 | $ | 6,845 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Crew
costs and related costs
|
$ | 610 | $ | 3,408 | $ | 2,962 | ||||||
|
Insurance
expense
|
87 | 423 | 510 | |||||||||
|
Spares,
repairs, maintenance and other expenses
|
2,528 | 1,305 | 988 | |||||||||
|
Stores
and lubricants
|
310 | 883 | 1,009 | |||||||||
|
Management
fees(Note 3)
|
24,550 | 12,688 | 1,124 | |||||||||
|
Vetting,
insurances, spares and repairs (Note 3)
|
1,002 | - | - | |||||||||
|
Other
operating expenses
|
25 | 268 | 252 | |||||||||
|
Total
|
$ | 29,112 | $ | 18,975 | $ | 6,845 | ||||||
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
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, certain of the Partnership’s
activities give rise to U.S. Source International Transportation Income, and
future expansion of the Partnership’s 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, unless the exemption from U.S. taxation
under Section 883 of the Code applies.
|
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, and April 29, 2008 when the
shares of the vessel owning companies of the Initial Vessels, the M/T Attikos,
the M/T Amore Mio II, and the M/T Aristofanis were transferred from CMTC to the
Partnership respectively (Note 1). The cash flows for the years ended
December 31, 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:
|
Year
2007
|
Year
2008
|
|||||||
|
Cash
and cash equivalents
|
$ | 2,251 | $ | 2 | ||||
|
Trade
receivables
|
2,040 | 1,037 | ||||||
|
Due
from related parties
|
7,598 | 4,497 | ||||||
|
Prepayments
and other assets
|
428 | 353 | ||||||
|
Inventories
|
328 | 143 | ||||||
|
Deferred
charges
|
1,423 | 251 | ||||||
|
Total
assets
|
14,068 | 6,283 | ||||||
|
Trade
accounts payable
|
2,395 | 1,913 | ||||||
|
Due
to related parties
|
5,517 | 1,194 | ||||||
|
Accrued
liabilities
|
843 | 418 | ||||||
|
Deferred
revenue
|
5,213 | - | ||||||
|
Borrowings
|
213,843 | 76,997 | ||||||
|
Total
liabilities
|
227,811 | 80,522 | ||||||
|
Net
liabilities assumed by CMTC upon
contribution
to the Partnership
|
213,743 | 74,239 | ||||||
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.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
11.
|
Partners’
/ 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, 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 are held by CMTC. The
Partnership agreement provides that, during the subordination period, the common
units will have 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 do not accrue on the subordinated units. The purpose of
the subordinated units is to increase the likelihood that during the
subordination period there will be available cash to be distributed on the
common units.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
11.
|
Partners’
/ Stockholders’ Equity and Distributions –
Continued
|
Distributions of
Available Cash From Operating Surplus During the Subordination
Period: The Partnership
agreement requires that we will 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, 2008 our partners’ capital included the following
units:
|
As
of December 31, 2008
|
||||
|
Common
units
|
16,011,629 | |||
|
Subordinated
units
|
8,805,522 | |||
|
Number
of limited partners’ units outstanding
|
24,817,151 | |||
|
General
Partners units
|
506,472 | |||
|
Total
partnership’s units
|
25,323,623 | |||
As of
December 31, 2008, the Partnership’s units consisted of 16,011,629 common units
of which 13,512,500 units are held by third parties and 2,499,129 units are held
by CMTC, 8,805,522 subordinated units are held by CMTC and 506,472 general
partner units are held by the CGP, a wholly owned subsidiary of
CMTC.
During
the year ended December 31, 2008, the Partnership declared and paid dividends of
$1.615 to all unitholders amounting to $39,890.
During
the year ended December 31, 2007, the Partnership declared and paid dividends of
$0.7476 to all unitholders amounting to $17,026.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
11.
|
Partners’
/ Stockholders’ Equity and Distributions –
Continued
|
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 years ended
December 31, 2008, 2007 and 2006 such contributions amounted to $0,
$31,279 and $17,947 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 2008 and 2007 represents the
equity which retained by CMTC upon the contribution of the Initial and Non
Contracted Vessels to the
Partnership.
|
|
12.
|
Net
Income (loss) Per Unit
|
As
required by EITF Issue No. 03-6, “Participating Securities and Two-Class Method
under FASB Statement No. 128”, “Earnings Per Share”, 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 Capital Product Partners L.P.
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. Net
Partnership income for the year ended December 31, 2008 and for the period from
April 4, 2007 to December 31, 2007 were $50,767 and $21,571 respectively. The
limited partners’ interest in net income for the year ended December 31, 2008
and for the period from April 4, 2007 to December 31, 2007 were $48,294 and
$21,140 respectively.
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, 2008 the Partnership’s net income
exceeded the Second Target Distribution level, and as a result, increasing
percentages have been used in order to calculate the CGP’s interest in net
income. The amount of the incentive distributions allocated to the CGP, amounted
to $1,457 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, 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.
For the
year ended December 31, 2008, the Partnership’s net income exceeded the minimum
required quarterly distribution of $0.375 per common unit and as such the
assumed distribution of net income resulted in an equal distribution of net
income between the subordinated unitholders and common unitholders.
For the
year ended December 31, 2007, the Partnership’s net income did not exceed the
minimum required quarterly distribution of $0.375 per common unit ($0.3626
prorated for the period from April 4, 2007 to June 30, 2007) and consequently,
the assumed distribution of net income resulted in an unequal distribution of
net income between the subordinated unitholders and common
unitholders.
The
amount of historical earnings per unit for:
|
|
a)
the year ended December 31,
2006,
|
|
|
b)
the period from January 1, 2007 to April 3, 2007 for the Initial Vessels
and
|
|
|
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,
|
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 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.
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
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.
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
Commitments
– Continued:
|
(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
TC
|
11/2006
|
Morgan
Stanley
|
50/50
|
$20.0
|
|
M/T
Atrotos
|
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
Attikos
|
2.2
to 2.3 TC
|
07/2007
|
Trafigura
Beheer B.V.
|
-
|
$13.9
|
|
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
|
|
(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.
|
Capital
Product Partners L.P.
Notes
to the Consolidated and Combined Financial Statements
(In
thousands of United States dollars, except number of shares and
units)
|
13.
|
Commitments
and Contingencies– Continued
|
Commitments
– Continued:
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, 2008 will be:
|
Year
ended December, 31
|
Amount
|
|||
|
2009
|
$ | 107,738 | ||
|
2010
|
68,499 | |||
|
2011
|
30,849 | |||
|
2012
|
29,202 | |||
|
2013
|
29,018 | |||
|
Thereafter
|
42,786 | |||
|
Total
|
$ | 308,092 | ||
|
14.
|
Subsequent
Events
|
|
(a)
|
Dividends:
On January 30, 2009 the Partnership’s board of directors declared an
exceptional cash distribution of $1.05 per unit, which was paid on
February 13, 2009, to unitholders of record on February 10,
2009.
|
|
The
payment of the exceptional distribution also resulted in a distribution of
$12.5 million with respect to incentive distribution rights held by CGP,
in accordance with the terms of the partnership agreement. Furthermore,
CGP agreed to defer receipt of a portion of the incentive distribution
payment and will receive the $12.5 million of incentive payments in four
equal quarterly installments, with the first installment having been paid
in February 2009. Payment of each deferred quarterly installment is
subject to distributing at least the minimum quarterly distribution and
any arrearages of minimum quarterly distributions for the relevant
quarter.
|
|
(b)
|
Early
Termination of Subordination Period: The payment of this
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.
|
Following
the conversion of subordinated units into common units, our partners’ capital
included the following units:
|
As
of
December
31,
2008
|
||||
|
Common
units
|
24,817,151 | |||
|
Number
of limited partners’ units outstanding
|
24,817,151 | |||
|
General
Partners units
|
506,472 | |||
|
Total
partnership’s units
|
25,323,623 | |||
F-28
EXHIBIT
4.17
Capital
GP L.L.C.
3
Iassonos Street, Piraeus, 185 37 Greece
Capital
Product Partners L.P.
3
Iassonos Street
Piraeus,
185 37
Greece
January
30, 2009
Dear
Sirs,
We refer to the meeting of the board of
directors (the “Board”) of Capital
Product Partners L.P. (the “Partnership”) held in
January 2009 (the “Meeting”). Capitalized
terms not otherwise defined herein shall have the meaning as set forth in the
First Amended and Restated Agreement of Limited Partnership (the “Partnership
Agreement”) of the Partnership.
As the Partnership is aware, the Board
resolved in its Meeting to make a dividend distribution for the fourth quarter
of 2008 (the “Dividend”) which
under the provisions of the Partnership Agreement results in a distribution with
respect to Incentive Distribution Rights (the “IDR
Payment”). The IDR Payment is payable to Capital GP L.L.C.,
the General Partner, as the sole holder of the Incentive Distribution
Rights.
The General Partner has agreed to defer
payment of a portion of the IDR Payment in order to facilitate the Board’s
decision to make the Dividend and to address certain issues raised by the
independent directors in connection with the IDR Payment and the
Dividend.
Accordingly, the General Partner and
the Partnership hereby agree that the IDR Payment shall be made in four equal
installments on February 13, 2009 and on the respective payment dates for
distributions with respect to the first, second and third quarters of 2009,
provided, however, that such installment
payments shall only be made on each of the respective payment dates for the
first, second and third quarters of 2009 if the Partnership’s regular quarterly
distribution on such payment date equals or exceeds the Minimum Quarterly
Distribution plus any outstanding arrearages of the Minimum Quarterly
Distribution on such payment date.
This letter agreement shall be
construed in accordance with and governed by the laws of The Republic of the
Marshall Islands, without regard to the principles of conflicts of
law.
Yours
faithfully,
Capital
GP L.L.C.
By:
/s/ Ioannis E. Lazaridis
Name:
Ioannis E. Lazaridis
Title: Chief
Executive Officer and Chief Financial Officer of Capital GP L.L.C.
Agreed
and accepted by:
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.
EXHIBIT
8.1
LIST
OF SIGNIFICANT SUBSIDIARIES
The
following is a list of Capital Product Partners L.P.’s significant subsidiaries
as at December 31, 2008:
|
Name of Subsidiary
|
Jurisdiction of
Incorporation
|
Proportion of Ownership
Interest
|
|
Capital
Product Operating GP L.L.C.
|
Republic
of The Marshall Islands
|
100%
|
EXHIBIT
12.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
I,
Ioannis E. Lazaridis, certify that:
|
1.
|
I
have reviewed this annual report on Form 20-F of Capital Product Partners
L.P.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company
as of, and for, the periods presented in this
report;
|
|
4.
|
The
company’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the company and
have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision 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;
|
|
c.
|
Evaluated
the effectiveness of the company’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
and
|
|
d.
|
Disclosed
in this report any change in the company’s internal control over financial
reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially
affect, the company’s internal control over financial reporting;
and
|
|
5.
|
The
company’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of
directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the company’s internal control
over financial reporting.
|
Dated:
March 27, 2009
By: /s/ Ioannis E.
Lazaridis
Name Ioannis
E. Lazaridis
Title: Chief
Executive Officer
EXHIBIT
12.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
I,
Ioannis E. Lazaridis, certify that:
|
1.
|
I
have reviewed this annual report on Form 20-F of Capital Product Partners
L.P.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company
as of, and for, the periods presented in this
report;
|
|
4.
|
The
company’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the company and
have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision 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;
|
|
c.
|
Evaluated
the effectiveness of the company’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
and
|
|
d.
|
Disclosed
in this report any change in the company’s internal control over financial
reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially
affect, the company’s internal control over financial reporting;
and
|
|
5.
|
The
company’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of
directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the company’s internal control
over financial reporting.
|
Dated:
March 27, 2009
By: /s/ Ioannis E.
Lazaridis
Name: Ioannis
E. Lazaridis
Title: Chief
Financial Officer
EXHIBIT
13.1
Certification
Pursuant to
18
U.S.C. Section 1350
As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In
connection with the annual report on Form 20-F of Capital Product Partners L.P.,
a master limited partnership organized under the laws of the Republic of The
Marshall Islands (the "Company"), for the period ending December 31, 2008 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), each of the undersigned officers of the Company certify pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 that:
|
1.
|
the
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
2.
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
Dated:
March 27, 2009
By:
/s/ Ioannis E.
Lazaridis
Name: Ioannis
E. Lazaridis
Title: Chief
Executive Officer and Chief Financial Officer
EXHIBIT
15.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement No. 333
- -153274 on Form F-3 of our reports dated March 26, 2009, relating to the
consolidated and combined financial statements of Capital Product Partners L.P.
(the “Partnership”) (which report expresses an unqualified opinion and includes
explanatory paragraphs relating to (1) the formation of Capital Product Partners
L.P. and the preparation of the portion of the combined financial
statements attributable to the period through April 4, 2007 from the separate
records maintained by Capital Maritime & Trading Corp., and (2) the
preparation of the portion of the combined financial statements attributable to
the Ross Shipmanagement Co., Baymont Enterprises Incorporated, and Forbes
Maritime Co., prior to the vessel acquisition by the Partnership, from the
separate records maintained by Capital Maritime & Trading Corp.) and
management’s report on the effectiveness of the Partnership’s internal control
over financial reporting, appearing in this Annual Report on Form 20-F of the
Partnership for the year ended December 31, 2008.
/s/
Deloitte. Hadjipavlou, Sofianos & Cambanis S.A.
Athens,
Greece
March 26,
2009