UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 20-F
(Mark
One)
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o
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2009
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
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OR
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o
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company
report:
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Commission
file number: 1-33373
CAPITAL
PRODUCT PARTNERS L.P.
(Exact
name of Registrant as specified in its charter)
Republic
of The Marshall Islands
(Jurisdiction
of incorporation or organization)
3
Iassonos Street, Piraeus, 18537 Greece
+30 210 458 4950
(Address and telephone number of principal executive offices)
Ioannis
E. Lazaridis
Chief Executive
Officer and Chief Financial Officer
3
Iassonos Street, Piraeus, 18537 Greece
Tel.
+30 210 458 4950
Fax. +30 210 428
4285
(Name,
address and telephone and facsimile numbers of contact person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
units representing limited partnership interests
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Nasdaq
Global Market
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Securities
registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of
the Act: None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
24,817,151
Common Units
506,472
General Partner Units
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES o NO x
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
YES o NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files.)
YES
o NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S.
GAAP x
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International
Financial Reporting Standards as issued o
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Other o
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by
the International Accounting Standards Board
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statements item the registrant has elected to
follow.
ITEM
17 o ITEM
18 o
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
CAPITAL
PRODUCT PARTNERS L.P.
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Not
applicable
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applicable
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applicable
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Not
applicable
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Not
applicable
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___________
This annual report on Form 20-F (the
“Annual Report”) should be read in conjunction with our audited consolidated and
combined financial statements and accompanying notes included
herein.
Statements included in this Annual
Report which are not historical facts (including statements concerning plans and
objectives of management for future operations or economic performance, or
assumptions related thereto) are forward-looking statements. In addition, we and
our representatives may from time to time make other oral or written statements
which are also forward-looking statements. Such statements include, in
particular, statements about our plans, strategies, business prospects, changes
and trends in our business, financial condition and the markets in which we
operate, and involve risks and uncertainties. In some cases, you can identify
the forward-looking statements by the use of words such as “may”, “could”,
“should”, “would,” “expect”, “plan”, “anticipate”, “intend”, “forecast”,
“believe”, “estimate”, “predict”, “propose”, “potential”, “continue” or the
negative of these terms or other comparable terminology. Forward-looking
statements appear in a number of places and include statements with respect to,
among other things:
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expectations of our ability to
make cash distributions on the
units;
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our future financial condition
or results of operations and our future revenues and expenses, including
revenues from profit sharing arrangements and required levels of
reserves;
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future levels of operating
surplus and levels of distributions as well as our future cash
distribution policy;
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the potential results of the
early termination of the subordination
period;
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tanker market conditions and
fundamentals, including the balance of supply and demand in those
markets;
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future charter hire rates and
vessel values;
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anticipated future acquisition
of vessels from Capital Maritime & Trading Corp. (“Capital Maritime”
or “CMTC”) or from third
parties;
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anticipated chartering
arrangements with Capital Maritime in the
future;
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our anticipated growth
strategies;
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our ability to access debt,
credit and equity markets;
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the repayment of debt and
settling of interest rate swaps, if
any;
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the effectiveness of our risk
management policies and procedures and the ability of counterparties to
own derivative contracts to fulfill their contractual
obligations;
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future refined product and
crude oil prices and
production;
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planned capital expenditures
and availability of capital resources to fund capital
expenditures;
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future supply of, and demand
for, refined products and crude
oil;
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increases in domestic or
worldwide oil consumption;
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changes in interest
rates;
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our ability to maintain
long-term relationships with major refined product importers and
exporters, major crude oil companies, and major commodity
traders;
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our ability to maximize the
use of our vessels, including the re-deployment or disposition of vessels
no longer under long-term time
charter;
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our ability to leverage to our
advantage Capital Maritime’s relationships and reputation in the shipping
industry;
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our continued ability to enter
into long-term, fixed-rate time charters with our tanker charterers and to
re-charter our vessels as their existing charters
expire;
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obtaining tanker projects that
we or Capital Maritime bid
on;
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changes in the supply of
tanker vessels, including newbuildings or lower than anticipated scrapping
of older vessels;
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our ability to compete
successfully for future chartering and newbuilding
opportunities;
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the expected
changes to the regulatory requirements applicable to the oil
transportation industry, including, without limitation, requirements
adopted by international organizations or by individual countries or
charterers and actions taken by regulatory authorities and governing such
areas as safety and environmental
compliance;
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the expected cost of, and our
ability to comply with, governmental regulations and maritime
self-regulatory organization standards, as well as standard regulations
imposed by our charterers applicable to our
business;
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our anticipated general and
administrative expenses and our expenses under the management agreement
and the administrative services agreement with Capital Ship Management
Corp., a subsidiary of Capital Maritime (“Capital Ship
Management”), and for reimbursement for fees and costs of our general
partner;
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increases in costs and
expenses including but not limited to: crew wages, insurance, provisions,
lube oil, bunkers, repairs, maintenance and general and administrative
expenses;
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the adequacy of our insurance
arrangements;
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the expected impact of
heightened environmental and quality concerns of insurance underwriters,
regulators and charterers;
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the anticipated taxation of
our partnership and distributions to our
unitholders;
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estimated future maintenance
and replacement capital
expenditures;
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expected demand in the
shipping sectors in which we operate in general and the demand for our
medium range vessels in
particular;
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the expected lifespan of our
vessels;
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our ability to employ and
retain key employees;
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customers’ increasing emphasis
on environmental and safety
concerns;
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expected financial flexibility
to pursue acquisitions and other expansion
opportunities;
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anticipated funds for
liquidity needs and the sufficiency of cash
flows;
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our ability to increase our
distributions over time;
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future sales of our units in
the public market; and
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our business strategy and
other plans and objectives for future
operations.
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These and other forward-looking
statements are made based upon management’s current plans, expectations,
estimates, assumptions and beliefs concerning future events impacting us and
therefore involve a number of risks and uncertainties, including those risks
discussed in below in Item 3. Key Information–Risk
Factors. The risks, uncertainties and assumptions involve known and
unknown risks and are inherently subject to significant uncertainties and
contingencies, many of which are beyond our control. We caution that
forward-looking statements are not guarantees and that actual results could
differ materially from those expressed or implied in the forward-looking
statements.
We undertake no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict all of these factors. Further, we cannot assess the
impact of each such factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to be materially different from
those contained in any forward- looking statement. You should carefully review
and consider the various disclosures included in this Annual Report and in our
other filings made with the U.S. Securities and Exchange Commission (the “SEC”)
that attempt to advise interested parties of the risks and factors that may
affect our business, prospects and results of operations.
Not Applicable.
Not Applicable.
Selected Financial Data
We have derived the following selected
historical financial and other data for the three years ending December 31,
2009, from our audited consolidated and
combined financial statements for the years ended December 31, 2009, 2008 and
2007 (the “Financial Statements”) respectively, appearing elsewhere in this
Annual Report. The historical financial data presented for the year ended
December 31, 2006 and 2005 have been derived from audited financial statements
not included in this Annual Report and are provided for comparison purposes
only.
Our historical results are not
necessarily indicative of the results that may be expected in the future.
Specifically, the financial statements for the years ended December 31, 2006 and
2005 are not comparable to our financial statements for the years ended December
31, 2009, 2008 and 2007. Our initial public offering on April 3, 2007, and
certain other transactions that occurred thereafter, including the delivery or
acquisition of ten additional vessels, the exchange of two vessels, the new
charters our vessels entered into, the agreement we entered into with Capital
Ship Management for the provision of management and administrative services to
our fleet for a fixed fee and certain new financing and interest rate swap
arrangements we entered into, have affected our results of operations.
Furthermore, for the year ended December 31, 2006, only six of the vessels in
our current fleet had been delivered to Capital Maritime and only two were in
operation for the full year. In addition, all the vessels comprising our fleet
at the time of our initial public offering as well as the subsequently acquired
M/T Attikos and the M/T Aristofanis were under construction during the year
ended December 31, 2005. The M/T Attikos and the M/T Aristofanis were delivered
to Capital Maritime in January and June 2005, respectively. Consequently, the
below table should be read together with, and is qualified in its entirety by
reference to, the Financial Statements and the accompanying notes included
elsewhere in this Annual Report. The table should also be read together with
“Item 5A: Operating and Financial Review and Prospects—Management’s Discussion
and Analysis of Financial Condition and Results of Operations”.
Our Financial Statements are prepared
in accordance with United States generally accepted accounting principles after
giving retroactive effect to the combination of entities under common control as
described in Note 1 (Basis of Presentation and General Information) to the
Financial Statements included herein. All numbers are in thousands of U.S.
Dollars, except numbers of units and earnings per unit.
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Year
Ended
Dec.31, 2009
(1)
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Year
Ended
Dec. 31, 2008
(1)
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Year
Ended
Dec. 31, 2007
(1)
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Year
Ended
Dec. 31, 2006
(1)
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Year
Ended
Dec. 31, 2005
(1)
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Income
Statement Data:
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Revenues
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$ | 123,477 | $ | 132,675 | $ | 86,545 | $ | 24,605 | $ | 6,671 | ||||||||||
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Expenses:
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Voyage
expenses (2)
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1,059 | 1,123 | 3,553 | 427 | 555 | |||||||||||||||
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Vessel
operating expenses—related-party (3)
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30,095 | 25,653 | 12,688 | 1,124 | 360 | |||||||||||||||
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Vessel
operating expenses (3)
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499 | 3,803 | 6,287 | 5,721 | 3,285 | |||||||||||||||
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General
and administrative
expenses
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2,876 | 2,817 | 1,477 | - | - | |||||||||||||||
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Depreciation
and
amortization
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28,264 | 25,185 | 15,363 | 3,772 | 595 | |||||||||||||||
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Total
operating expenses
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62,793 | 58,581 | 39,368 | 11,044 | 4,795 | |||||||||||||||
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Operating
income (expense)
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60,684 | 74,094 | 47,177 | 13,561 | 1,876 | |||||||||||||||
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Interest
expense and finance costs
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(32,115 | ) | (25,602 | ) | (13,121 | ) | (5,117 | ) | (653 | ) | ||||||||||
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Loss
on interest rate swap agreement
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- | - | (3,763 | ) | - | - | ||||||||||||||
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Interest
income
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1,478 | 1,283 | 711 | 13 | 6 | |||||||||||||||
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Foreign
currency gain/(loss), net
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(12 | ) | (56 | ) | (45 | ) | (63 | ) | 18 | |||||||||||
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Net
income (loss)
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$ | 30,035 | $ | 49,719 | $ | 30,959 | $ | 8,394 | $ | 1,247 | ||||||||||
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Less:
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Net
(loss) / income attributable to CMTC operations:
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810 | (1,048 | ) | 9,388 | 8,394 | 1,247 | ||||||||||||||
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Partnership’s
net income
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29,225 | 50,767 | 21,571 | - | - | |||||||||||||||
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General
partner’s interest in our net income
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584 | 13,485 | 431 | - | - | |||||||||||||||
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Limited
partners’ interest in our net income
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28,641 | 37,282 | 21,140 | - | - | |||||||||||||||
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Net
income allocable to limited partner per (4):
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Common unit (basic and
diluted)
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1.15 | 1.56 | 1.11 | - | - | |||||||||||||||
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Subordinated unit (basic and
diluted)
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1.17 | 1.50 | 0.70 | - | - | |||||||||||||||
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Total unit (basic and
diluted)
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1.15 | 1.54 | 0.95 | - | - | |||||||||||||||
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Weighted-average
units outstanding (basic and diluted):
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Common units
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23,755,663 | 15,379,212 | 13,512,500 | - | - | |||||||||||||||
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Subordinated units
(5)
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1,061,488 | 8,805,522 | 8,805,522 | - | - | |||||||||||||||
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Total units
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24,817,151 | 24,184,734 | 22,318,022 | - | - | |||||||||||||||
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Balance Sheet Data (at
end of period):
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Vessels,
net and under construction
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$ | 638,723 | $ | 718,153 | $ | 535,165 | $ | 227,517 | $ | 59,926 | ||||||||||
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Total
assets
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681,087 | 776,883 | 566,957 | 237,828 | 61,692 | |||||||||||||||
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Total
partners’ capital / stockholders’ equity
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157,128 | 193,926 | 194,341 | 61,067 | 25,566 | |||||||||||||||
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Number
of shares/units
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25,323,623 | 25,323,623 | 22,773,492 | 5,200 | 4,200 | |||||||||||||||
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Common
units
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24,817,151 | 16,011,629 | 13,512,500 | - | - | |||||||||||||||
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Subordinated
units
(5)
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- | 8,805,522 | 8,805,522 | - | - | |||||||||||||||
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General
Partner
units
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506,472 | 506,472 | 455,470 | - | - | |||||||||||||||
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Dividends
declared per unit
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$ | 2.27 | $ | 1.62 | $ | 0.75 | - | - | ||||||||||||
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Cash
Flow Data:
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Net
cash provided by operating activities
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$ | 70,078 | $ | 75,144 | $ | 53,663 | $ | 10,422 | $ | 2,219 | ||||||||||
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Net
cash used in investing
activities
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(55,770 | ) | (270,003 | ) | (335,696 | ) | (171,364 | ) | (34,322 | ) | ||||||||||
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Net
cash provided by financing activities
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(53,905 | ) | 218,089 | 300,713 | 162,174 | 32,095 | ||||||||||||||
___________
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(1)
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The
amount of historical earnings per unit
for:
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a)
the years ended December 31, 2005 and
2006,
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b)
the period from January 1, 2007 to April 3, 2007 for the vessels in our
fleet at the time of our initial public
offering,
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c)
the period from January 1, 2007 to September 23, 2007, March 26, 2008 and
April 29, 2008 for the M/T Attikos, the M/T Amore Mio II and
the M/T Aristofanis, respectively,
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d)
the years ended December 31, 2007 and 2008 and the period from January 1,
2009 to April 6, 2009 and April 12, 2009 for the M/T Agamemnon II, and M/T
Ayrton II respectively, giving retroactive impact to the number of common
and subordinated units (and the 2% general partner interest) that were
issued, is not presented in our selected historical financial data. We do
not believe that a presentation of earnings per unit for these periods
would be meaningful to our investors as the vessels comprising our current
fleet were either under construction or operated as part of Capital
Maritime’s fleet with different terms and conditions than those in place
after their acquisition by us.
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(2)
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Vessel
voyage expenses primarily consist of commissions, port expenses, canal
dues and bunkers.
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(3)
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Since
April 4, 2007, our vessel operating expenses have consisted primarily of
management fees payable to Capital Ship Management Corp., our manager, who
provides commercial and technical services such as crewing, repairs and
maintenance, insurance, stores, spares and lubricants, as well as
administrative services pursuant to management and administrative services
agreements.
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(4)
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On
January 1, 2009 we adopted new accounting guidance relating to the
Application of the Two-Class Method and its application to Master Limited
Partnerships which considers whether the incentive distributions of a
master limited partnership represent a participating security when
considered in the calculation of earnings per unit under the Two-Class
Method. This new guidance also considers whether the partnership agreement
contains any contractual limitations concerning distributions to the
incentive distribution rights that would impact the amount of earnings to
allocate to the incentive distribution rights for each reporting period.
We retrospectively applied the provisions of this new guidance to the
years ended December 31, 2007 and 2008. Following the application of the
above guidance our earnings per unit for the year ended December 31, 2008
decreased from $2.00 to $1.54. For the year ended December 31, 2007 our
earnings per unit remained
unchanged.
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(5)
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Following
the early termination of the subordination period on February 14, 2009,
all of our 8,805,522 subordinated units converted into common units on a
one-for-one basis. Please read Item 7B: “Termination of the Subordination
period” for additional information.
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Risk
Factors
Some of
the following risks relate principally to the countries and the industry in
which we operate and the nature of our business in general. Although many
of our business risks are comparable to those of a corporation engaged in a
similar business would face, limited partner interests are inherently different
from the capital stock of a corporation. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial also may impair our business
operations. In particular, if any of the following risks actually occurs,
our business, financial condition or operating results could be materially
adversely affected. In that case, we might not be able to pay distributions on
our common units, the trading price of our common units could decline, and you
could lose all or part of your investment.
Risks
Inherent in Our Business
The
current global economic downturn may have a material adverse effect on our
business, financial position and results of operations as well as on our ability
to recharter our vessels at favorable rates.
Oil has
been one of the world’s primary energy sources for a number of decades. The
global economic growth of previous years had a significant impact on the demand
for oil and subsequently on the oil trade and shipping demand. However, during
the second half of 2008 and throughout 2009 we have experienced a major economic
slowdown which is ongoing and the duration of which is very difficult to
forecast and which has, and is expected to continue to have, a significant
impact on world trade, including the oil trade. In this global economy,
operating businesses have been facing tightening credit, weakening demand for
goods and services, deteriorating international liquidity conditions, and
declining financial markets. Demand for oil and refined petroleum products has
contracted sharply as a result of the global economic slow-down, which in
combination with the diminished availability of trade credit has led to
decreased demand for tanker vessels, creating downward pressure on charter
rates. This economic downturn has also affected vessel values
overall. If the current global economic environment persists we may
not be able to operate our vessels profitably or employ our vessels at favorable
charter rates as they come up for rechartering. Furthermore, a significant
decrease in the market value of our vessels may cause us to recognize losses if
any of our vessels are sold or if their values are impaired, and may affect our
ability to comply with our loan covenants. A continuing negative change in
global economic conditions is expected to have a material adverse effect on our
business, financial position, results of operations and ability to make cash
distributions and comply with our loan covenants, as well as our future
prospects and ability to grow our fleet.
Changes
in the oil markets could result in decreased demand for our vessels and
services.
Demand
for our vessels and services in transporting oil depends upon world and regional
oil markets. Any decrease in shipments of refined petroleum products in those
markets could have a material adverse effect on our business, financial
condition and results of operations. Historically, those markets have been
volatile as a result of the many conditions and events that affect the price,
production and transport of oil, including competition from alternative energy
sources. In the long term, oil demand may be reduced by an increased reliance on
alternative energy sources and/or a drive for increased efficiency in the use of
oil as a result of environmental concerns or high oil prices. The current
recession affecting the U.S. and world economies may result in protracted
reduced consumption of oil products and a decreased demand for our vessels and
lower charter rates, which could have a material adverse effect on our business,
results of operations, cash flows, financial condition and ability to make cash
distributions.
We
may not have sufficient cash from operations to enable us to pay the quarterly
distribution on our common units following the establishment of cash reserves
and payment of fees and expenses.
We may
not have sufficient cash available each quarter to pay the declared quarterly
distribution per common unit following establishment of cash reserves and
payment of fees and expenses. The amount of cash we can distribute on our common
units principally depends upon the amount of cash we generate from our
operations, which may fluctuate based on numerous factors generally described
under this “Risk Factors” heading, including, among other
things:
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the
rates we obtain from our charters;
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our
ability to recharter our vessels at competitive rates as their current
charters expire;
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the
ability of our customers to meet their obligations under the terms of the
charter agreements, including the timely payment of the rates under the
agreements;
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the
continued sustainability of our
customers;
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the
level of additional revenues we generate from our profit sharing
arrangements, if any;
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the
level of our operating costs, such as the cost of crews and insurance,
following the expiration of our management agreement pursuant to which we
pay a fixed daily fee for an initial term of approximately five years from
the time we take delivery of each vessel, which includes the expenses for
its next scheduled special or intermediate survey, as applicable, and
related drydocking;
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the
number of unscheduled off-hire days for our fleet and the timing of, and
number of days required for, scheduled drydocking of our
vessels;
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the
amount of extraordinary costs incurred by our manager while managing our
vessels not covered under our fixed fee arrangement which we may have to
reimburse our manager for;
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delays
in the delivery of any newbuildings we may contract to acquire and the
beginning of payments under charters relating to those
vessels;
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demand
for seaborne transportation of refined oil products and crude
oil;
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supply
of product and crude oil tankers and specifically the number of
newbuildings entering the world tanker fleet each
year;
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force
majeure events;
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prevailing
global and regional economic and political conditions;
and
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the
effect of governmental regulations and maritime self-regulatory
organization standards on the conduct of our
business.
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The actual amount of cash we will have
available for distribution also will depend on other factors, some of which are
beyond our control, such as:
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the
level of capital expenditures we make, including for maintaining vessels,
building new vessels, acquiring existing vessels and complying with
regulations;
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our
debt service requirements, including our obligation to pay increased
interest costs in certain circumstances, and restrictions on distributions
contained in our debt instruments;
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our
ability to comply with covenants under our credit facilities, including
our ability to comply with certain ‘asset maintenance’
ratios
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interest
rate fluctuations;
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the
cost of acquisitions, if any;
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fluctuations
in our working capital needs;
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our
ability to make working capital borrowings, including to pay distributions
to unitholders; and
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the
amount of any cash reserves, including reserves for future maintenance and
replacement capital expenditures, working capital and other matters,
established by our board of directors in its
discretion.
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The amount of cash we generate from our
operations may differ materially from our profit or loss for the period, which
will be affected by non-cash items. As a result of this and the other factors
mentioned above, we may make cash distributions during periods when we record
losses and may not make cash distributions during periods when we record net
income.
The
shipping industry is cyclical, which may lead to lower charter hire rates,
defaults of our charterers and lower vessel values, resulting in decreased
distributions to our unitholders.
The
shipping industry is cyclical, which may result in volatility in charter hire
rates and vessel values. We may not be able to successfully charter our vessels
in the future or renew existing charters at the same or similar rates. Even if
we manage to successfully charter our vessels in the future, our charterers may
go bankrupt or fail to perform their obligations under the charter agreements,
they may delay payments or suspend payments altogether, they may terminate the
charter agreements prior to the agreed upon expiration date or they may attempt
to re-negotiate the terms of the charters. If we are required to enter into a
charter when charter hire rates are low, our results of operations and our
ability to make cash distributions to our unitholders could be adversely
affected.
In addition, the market value and
charter hire rates of product and crude oil tankers can fluctuate substantially
over time due to a number of different factors, including:
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regional availability of refining capacity; | |
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prevailing
economic conditions in the market in which the vessel
trades;
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availability
of credit to charterers and traders in order to finance expenses
associated with the relevant trades;
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regulatory
change;
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levels of demand for the seaborne transportation of refined products and crude oil; | |
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changes in the supply of vessel capacity; and | |
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the
cost of retrofitting or modifying existing ships, as a result of
technological advances in vessel design or equipment, changes in
applicable environmental or other regulations or standards, or
otherwise.
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From time to time, we expect to enter
into agreements with Capital Maritime or other unaffiliated third parties to
purchase additional newbuildings or other vessels (or interests in vessel-owning
companies). Between the time we enter into an agreement for such
purchase and delivery of the vessel, the market value of similar vessels may
decline. The market value of vessels is influenced by the ability of
buyers to access bank finance and equity capital and any disruptions to the
market and the possible lack of adequate available finance may negatively affect
such market values. Despite a decline in market values we would still
be required to purchase the vessel at the agreed-upon price.
If we sell a vessel at a time when the
market value of our vessels has fallen, the sale may be at less than the
vessel’s carrying amount, resulting in a loss. In addition, a decrease in the
future charter rate and/or market value of our vessels could potentially result
in an impairment charge. A decline in the market value of our vessels could also
lead to a default under any prospective credit facility to which we become a
party, affect our ability to refinance our existing credit facilities and/or
limit our ability to obtain additional financing.
Spot
market rates for tanker vessels are highly volatile and are currently at
relatively low levels historically and may further decrease in the
future, which may adversely affect our earnings and ability to make cash
distributions in the event that our vessels are chartered in the spot
market.
We
currently charter one vessel in the spot market. In addition, the charters of
eight of our 18 vessels are scheduled to expire during 2010. If we cannot obtain
favorable medium- or long term charters for these vessels we may have to deploy
these vessels in the spot market in which case we will be exposed to the
cyclicality and volatility of the spot charter market. Although spot chartering
is common in the tanker industry, tanker charter hire rates are highly volatile
and may fluctuate significantly based upon demand for seaborne transportation of
crude oil and oil products as well as tanker supply. The world oil demand is
influenced by many factors, including international economic activity;
geographic changes in oil production, processing, and consumption; oil price
levels; inventory policies of the major oil and oil trading companies; and
strategic inventory policies of countries such as the United States and China.
The successful operation of our vessels in the spot charter market depends upon,
among other things, obtaining profitable spot charters and minimizing, to the
extent possible, time spent waiting for charters and time spent traveling
unladen to pick up cargo. Furthermore, as charter rates for spot charters are
fixed for a single voyage which may last up to several weeks, during periods in
which spot charter rates are rising, we will generally experience delays in
realizing the benefits from such increases.
The spot market is highly volatile,
and, in the past, there have been periods when spot rates have declined below
the operating cost of vessels. Currently charterhire rates are at relatively low
rates historically and there is no assurance that the tanker charter market will
recover over the next several months or will not continue to decline further. If
future spot charter rates decline, we may be unable to operate our vessels
trading in the spot market profitably, meet our obligations, including payments
on indebtedness, or to make cash distributions.
An
over-supply of tanker vessel capacity may lead to reductions in charterhire
rates and profitability.
The market supply of tanker vessels has
been increasing as a result of the delivery of substantial newbuilding orders
over the last few years, which, based on the current order book, is expected to
continue during 2010 and into 2011. Newbuildings were delivered in significant
numbers starting at the beginning of 2006 and continued to be delivered in
significant numbers through 2007, 2008, and 2009. In addition, the rate of
newbuilding supply might accelerate in 2010. An oversupply of tanker vessel
capacity may result in a further reduction of charterhire rates. If such a
further reduction occurs, we may only be able to recharter our vessels at
reduced or unprofitable rates as their current charters expire, or we may not be
able to charter these vessels at all. The occurrence of these events could have
a material adverse effect on our business, results of operations, cash flows,
financial condition and ability to make cash distributions.
We
must make substantial capital expenditures to maintain the operating capacity of
our fleet, which will reduce our cash available for distribution. In addition,
each quarter our board of directors is required to deduct estimated maintenance
and replacement capital expenditures from operating surplus, which may result in
less cash available to unitholders than if actual maintenance and replacement
capital expenditures were deducted.
We must
make substantial capital expenditures to maintain, over the long term, the
operating capacity of our fleet. These maintenance and replacement capital
expenditures include capital expenditures associated with drydocking a vessel,
modifying an existing vessel or acquiring a new vessel to the extent these
expenditures are incurred to maintain the operating capacity of our fleet. These
expenditures could increase as a result of changes in:
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the
cost of our labor and materials;
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the
cost and replacement life of suitable replacement
vessels;
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customer/market
requirements;
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increases
in the size of our fleet;
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the
age of the vessels in our fleet;
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charter
rates in the market; and
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governmental
regulations, industry and maritime self-regulatory organization standards
relating to safety, security or the
environment.
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Our significant maintenance and
replacement capital expenditures will reduce the amount of cash we have
available for distribution to our unitholders. Any costs associated with
scheduled drydocking are included in a fixed daily fee per time chartered
vessel, that we pay Capital Ship Management under a management agreement, for an
initial term of approximately five years from the time we take delivery of each
vessel, which includes the expenses for its next scheduled special or
intermediate survey, as applicable. In the event our management agreement is not
renewed or is materially amended, we may have to separately deduct estimated
capital expenditures associated with drydocking from our operating surplus in
addition to estimated replacement capital expenditures.
Our partnership agreement requires our
board of directors to deduct estimated, rather than actual, maintenance and
replacement capital expenditures from operating surplus each quarter in an
effort to reduce fluctuations in operating surplus. The amount of estimated
capital expenditures deducted from operating surplus is subject to review and
change by the conflicts committee at least once a year. In years when estimated
capital expenditures are higher than actual capital expenditures, the amount of
cash available for distribution to unitholders will be lower than if actual
capital expenditures were deducted from operating surplus. If our board of
directors underestimates the appropriate level of estimated maintenance and
replacement capital expenditures, we may have less cash available for
distribution in future periods when actual capital expenditures exceed our
previous estimates.
If
Capital Maritime or any third party seller we may contract with in the future
for the purchase of newbuildings fails to make construction payments for such
vessels, the shipyard may rescind the purchase contract and we may lose access
to such vessels or need to finance such vessels before they begin operating,
which could harm our business and our ability to make cash
distributions.
The seven newbuildings we have acquired
since our initial public offering (the “IPO”) were contracted directly by
Capital Maritime and all costs for the construction and delivery of such
vessels were incurred by Capital Maritime. In the future, we may enter into
similar arrangements with Capital Maritime or other third parties for the
acquisition of newbuildings. If Capital Maritime or any third party sellers we
contract with in the future fail to make construction payments for the
newbuildings after receiving notice by the shipbuilder following nonpayment on
any installment due date, the shipbuilder could rescind the newbuilding purchase
contract. As a result of such default, Capital Maritime or the third party
seller could lose all or part of the installment payments made prior to such
default, and we could either lose access to such newbuilding or any future
vessels we contract to acquire or may need to finance such vessels before they
begin operating and generating voyage revenues, which could harm our business
and reduce our ability to make cash distributions.
If
we finance the purchase of vessels through cash from operations, by increasing
our indebtedness or by issuing debt or equity securities, our ability
to make cash distributions may be diminished, our financial leverage could
increase or our unitholders could be diluted. In addition, if we expand the size
of our fleet by directly contracting newbuildings, we generally will be required
to make significant installment payments for such acquisitions prior to their
delivery and generation of revenue.
The
actual cost of a new product or crude oil tanker varies significantly depending
on the market price charged by shipyards, the size and specifications of the
vessel, whether a charter is attached to the vessel and the terms of such
charter, governmental regulations and maritime self-regulatory organization
standards. The total delivered cost of a vessel will be higher and include
financing, construction supervision, vessel start-up and other
costs.
To date, all the newbuildings we have
acquired have been contracted directly by Capital Maritime and all costs for the
construction and delivery of these vessels have been incurred by Capital
Maritime. As of December 31, 2009, our fleet consisted of 18 vessels, only seven
of which had been part of our initial fleet at the time of our IPO. We have
financed the purchase of the additional vessels either with debt, or partly with
debt, cash and partly by issuing additional equity securities. If we
issue additional common units or other equity securities, our existing
unitholders’ ownership
interest in us will be diluted. Please read “—We may issue additional equity
securities without your approval, which would dilute your ownership interest”
below.
If we elect to expand our fleet in the
future by entering into contracts for newbuildings directly with shipyards, we
generally will be required to make installment payments prior to their delivery.
We typically must pay 5% to 25% of the purchase price of a vessel upon signing
the purchase contract, even though delivery of the completed vessel will not
occur until much later (approximately 18-36 months later for current orders)
which could reduce cash available for distributions to unitholders. If we
finance these acquisition costs by issuing debt or equity securities, we will
increase the aggregate amount of interest payments or quarterly distributions we
must make prior to generating cash from the operation of the
newbuilding.
To fund the acquisition price of any
additional vessels we may contract to purchase from Capital Maritime or other
third parties and other related capital expenditures, we will be required to use
cash from operations or incur borrowings or raise capital through the sale of
debt or additional equity securities. Use of cash from operations will reduce
cash available for distributions to unitholders. Even if we are successful in
obtaining necessary funds, the terms of such financings could limit our ability
to pay cash distributions to unitholders. Incurring additional debt may
significantly increase our interest expense and financial leverage, and issuing
additional equity securities may result in significant unitholder dilution and
would increase the aggregate amount of cash required to meet our quarterly
distributions to unitholders, which could have a material adverse effect on our
ability to make cash distributions.
Our
ability to obtain bank financing and/or to access the capital markets for future
equity offerings may be limited by prevailing economic conditions. The
restrictions imposed by our credit facilities may also limit our ability to
access such financing, even if it is available. If we are unable to obtain
financing or access the capital markets, we may be unable to complete any future
purchases of vessels from Capital Maritime or from third parties.
Given the
prevailing market and economic conditions, including today’s financial turmoil
affecting the world’s debt, credit and capital markets, the ability of banks and
credit institutions to finance new projects, including the acquisition of new
vessels in the future, is uncertain. In addition, our ability to obtain bank
financing or to access the capital markets for future offerings may be limited
by our financial condition at the time of any such financing or offering, as
well as by the continuing adverse market conditions resulting from, among other
things, general economic conditions, weakness in the financial markets and
contingencies and uncertainties that are beyond our control. The restrictions
imposed by our credit facilities, including the obligation to comply with
certain asset maintenance and other ratios, may further restrict our ability to
access available financing. Our failure to obtain the funds for
necessary future capital expenditures could have a material adverse effect on
our business, results of operations and financial condition and on our ability
to make cash distributions. In addition to a major global economic slowdown, we
have been facing, and continue to face, a deterioration in the banking and
credit markets resulting in potentially higher interest costs and overall
limited availability of liquidity. As a result, the prevailing market and
economic conditions may affect our ability to complete any future purchases of vessels
from Capital Maritime or from third parties.
Our
debt levels may limit our flexibility in obtaining additional financing and in
pursuing other business opportunities.
We
entered into a $370.0 million revolving credit facility on March 22, 2007, as
amended, (our “existing credit facility”), and a further $350.0 million
revolving credit facility on March 19, 2008, as amended (our “new credit
facility” and together with our “existing credit facility”, our “credit
facilities”). As of December 31, 2009, we had drawn $366.5 million
under our existing credit facility and $107.5 million under our new credit
facility, and had $3.5 and $242.5 million available, respectively. For more
information regarding the terms of our credit facilities, please read “Item
5A—Operating
Results and Financial Review and Prospects—Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Borrowings—Revolving Credit
Facilities”. Our level of debt could have important consequences to us,
including the following:
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our
ability to obtain additional financing, if necessary, for working capital,
capital expenditures, acquisitions or other purposes may be impaired, or
such financing may not be available on favorable
terms;
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we
will need a substantial portion of our cash flow to make interest payments
and, following the end of the relevant non-amortizing periods, principal
payments on our debt, reducing the funds that would otherwise be available
for operations, future business opportunities and distributions to
unitholders;
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our
debt level will make us more vulnerable to competitive pressures, or to a
downturn in our business or in the economy in general, than our
competitors with less debt; and
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our
debt level may limit our flexibility in responding to changing business
and economic conditions.
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Our
ability to service our debt will depend upon, among other things, our future
financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors, some
of which are beyond our control. If our operating results are not sufficient to
service our current or future indebtedness, we may be forced to take actions
such as reducing or eliminating distributions, reducing or delaying
our business activities, acquisitions, investments or capital expenditures,
selling assets, restructuring or refinancing our debt, or seeking additional
equity capital or bankruptcy protection. We may not be able to effect any of
these remedies on satisfactory terms, or at all.
Our
credit facilities contain, and we expect that any future credit facilities we
may enter into will contain, restrictive covenants, which may limit our business
and financing activities, including our ability to make
distributions.
The
operating and financial restrictions and covenants in our credit facilities and
in any future credit facility we enter into could adversely affect our ability
to finance future operations or capital needs or to engage, expand or pursue our
business activities. For example, our credit facilities require the consent of
our lenders to, or limit our ability to, among other items:
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incur
or guarantee indebtedness;
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charge,
pledge or encumber the vessels;
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change
the flag, class, management or ownership of our
vessels;
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change
the commercial and technical management of our
vessels;
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sell
or change the beneficial ownership or control of our vessels;
and
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subordinate
our obligations thereunder to any general and administrative costs
relating to the vessels, including the fixed daily fee payable under the
management agreement.
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Our credit facilities also require us
to comply with the ISM Code and to maintain valid safety management certificates
and documents of compliance at all times.
In addition, effective for a three year
period from the end of June 2009 to the end of June 2012, our amended credit
facilities require us to:
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maintain
minimum free consolidated liquidity (50% of which may be in the form of
undrawn commitments under the relevant credit facility) of at least
$500,000 per financed vessel;
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maintain
a ratio of EBITDA (as defined in each credit facility) to interest expense
of at least 2.00 to 1.00 on a trailing four-quarter basis;
and
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maintain
a ratio of net Total Indebtedness to the aggregate Fair Market Value (as
defined in each credit facility) of our total fleet, current or future, of
no more than 0.80 (the “leverage
ratio”).
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We
are also required to maintain an aggregate fair market value of our
financed vessels equal to at least 125% of the aggregate amount
outstanding under each credit facility (the “collateral
maintenance”).
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The interest margin of our credit
facilities will increase from 1.35% to 1.45% over LIBOR subject to the level of
the leverage ratio and the collateral maintenance.
If
we are in breach of any of the terms of our credit facilities, as amended, a
significant portion of our obligations may become immediately due and payable,
and our lenders; commitment to make further loans to us may terminate. We may
also be unable to perform our business strategy.
Our
ability to comply with the covenants and restrictions contained in our credit
facilities and any other debt instruments we may enter into in the future may be
affected by events beyond our control, including prevailing economic, financial
and industry conditions. If market or other economic conditions deteriorate
further, our ability to comply with these covenants may be impaired. If we are
in breach of any of the restrictions, covenants, ratios or tests in our credit
facilities, especially if we trigger a cross-default currently contained in our
credit facilities or any interest rate swap agreements we have entered into
pursuant to their terms, a significant portion of our obligations may become
immediately due and payable, and our lenders’ commitment to make further loans
to us may terminate. We may not be able to reach agreement with our lenders to
amend the terms of the loan agreements or waive any breaches and we may not
have, or be able to obtain, sufficient funds to make any accelerated payments.
In addition, obligations under our credit facilities are secured by our vessels,
and if we are unable to repay debt under the credit facilities, the lenders
could seek to foreclose on those assets. Furthermore, if funds under our credit
facilities become unavailable as a result of a breach of our covenants or
otherwise, we may not be able to perform our business strategy which could have
a material adverse effect on our business, results of operations and financial
condition and our ability to make cash distributions.
Decreases
in asset values due to circumstances outside of our control may limit our
ability to make further draw-downs under our credit facilities which may limit
our ability to purchase additional vessels in the future. In addition, if asset
values continue to decrease significantly, we may have to pre-pay part of our
outstanding debt in order to remain in compliance with covenants under our
credit facilities.
Our
credit facilities require that we maintain an aggregate fair market value of the
vessels in our fleet at least 125% of the aggregate amount outstanding under
each credit facility. Any contemplated vessel acquisitions will have
to be at levels that do not impair the required ratios. The current severe
economic slowdown has had an adverse effect on tanker asset values which is
likely to persist if the economic slowdown continues. If the estimated asset
values of the vessels in our fleet continue to decrease, such decreases may
limit the amounts we can drawdown under our credit facilities to purchase
additional vessels and our ability to expand our fleet. In addition, we may be
obligated to pre-pay part of our outstanding debt in order to remain in
compliance with the relevant covenants in our credit facilities. As a result,
such decreases could have a material adverse effect on our business, results of
operations and financial condition and our ability to make cash
distributions.
Over
time, the value of our vessels may decline, which could adversely affect our
operating results.
Vessel
values for tankers can fluctuate substantially over time due to a number of
different factors. Vessel values may decline substantially from existing levels.
If operation of a vessel is not profitable, or if we cannot re-deploy a
chartered vessel at attractive rates upon charter termination, rather than
continue to incur costs to maintain and finance the vessel, we may seek to
dispose of it. Our inability to dispose of the vessel at a reasonable value
could result in a loss on its sale and adversely affect our results of
operations and financial condition. Further, if we determine at any time that a
vessel’s future useful life and earnings require us to impair its value on our
financial statements, we may need to recognize a significant charge against our
earnings.
Restrictions
in our debt agreements may prevent us from paying distributions.
Our
payment of interest and, following the end of the relevant non-amortizing
periods, principal on our debt will reduce cash available for distribution on
our units. In addition, our credit facilities prohibit the payment of
distributions if we are not in compliance with certain financial covenants
or upon the occurrence of an event of default or if the fair market
value of the vessels in our fleet is less than 125% of the aggregate amount
outstanding under each of our credit facilities.
Events of default under our credit
facilities include:
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failure
to pay principal or interest when
due;
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breach
of certain undertakings, negative covenants and financial covenants
contained in the credit facility, any related security document or
guarantee or the interest rate swap agreements, including failure to
maintain unencumbered title to any of the vessel-owning subsidiaries or
any of the assets of the vessel-owning subsidiaries and failure to
maintain proper insurance;
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any
breach of the credit facility, any related security document or guarantee
or the interest rate swap agreements (other than breaches described in the
preceding two bullet points) if, in the opinion of the lenders, such
default is capable of remedy and continues unremedied for 20 days after
written notice of the lenders;
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any
representation, warranty or statement made by us in the credit facility or
any drawdown notice thereunder or related security document or guarantee
or the interest rate swap agreements is untrue or misleading when
made;
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a
cross-default of our other indebtedness of $5.0 million or greater or of
the indebtedness of our subsidiaries of $750,000 or
greater;
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we
become, in the reasonable opinion of the lenders, unable to pay our debts
when due;
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any
of our or our subsidiaries’ assets are subject to any form of execution,
attachment, arrest, sequestration or distress in respect of a sum of $1.0
million or more that is not discharged within 10 business
days;
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an
event of insolvency or bankruptcy;
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cessation
or suspension of our business or of a material part
thereof;
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unlawfulness,
non-effectiveness or repudiation of any material provision of our credit
facility, of any of the related finance and guarantee documents or of our
interest rate swap agreements;
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failure
of effectiveness of security documents or
guarantee;
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the
common units cease to be listed on the Nasdaq Global Market or on any
other recognized securities
exchange;
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any
breach under any provisions contained in our interest rate swap
agreements;
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termination
of our interest rate swap agreements or an event of default thereunder
that is not remedied within five business
days;
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invalidity
of a security document in any material respect or if any security document
ceases to provide a perfected first priority security interest;
or
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any
other event that occurs or circumstance that arises in light of which the
lenders reasonably consider that there is a significant risk that we will
be unable to discharge our liabilities under the credit facility, related
security and guarantee documents or interest rate swap
agreements.
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We
anticipate that any subsequent refinancing of our current debt or any new debt
could have similar or more onerous restrictions. For more information regarding
our financing arrangements, please read “Item 5A: Operating and Financial Review
and Prospects —Management’s Discussion and Analysis of Financial Condition and
Results of Operations”.
Disruptions
in world financial markets and the resulting governmental action in the United
States and in other parts of the world could have a material adverse impact on
our results of operations, financial condition and cash flows, and could cause
the market price of our common units to decline.
In 2008
and 2009, global financial markets have experienced extraordinary disruption and
volatility following adverse changes in the global credit markets. The credit
markets in the United States have experienced significant contraction,
deleveraging and reduced liquidity, and governments around the world have taken
highly significant measures in response to such events, including the enactment
of the Emergency Economic Stabilization Act of 2008 in the United States, and
may implement other significant responses in the future. Securities and futures
markets and the credit markets are subject to comprehensive statutes,
regulations and other requirements. The SEC, other regulators, self-regulatory
organizations and exchanges have enacted temporary emergency regulations and may
take other extraordinary actions in the event of market emergencies and may
effect permanent changes in law or interpretations of existing laws. A
number of financial institutions have experienced serious financial difficulties
and, in some cases, have entered into bankruptcy proceedings or are in
regulatory enforcement actions. These difficulties have resulted, in part, from
declining markets for assets held by such institutions, particularly the
reduction in the value of their mortgage and asset-backed securities portfolios.
These difficulties have been compounded by a general decline in the willingness
by banks and other financial institutions to extend credit. In addition, these
difficulties may adversely affect the financial institutions that provide our
credit facilities and may impair their ability to continue to perform under
their financing obligations to us, which could have an impact on our ability to
fund current and future obligations.
We
currently derive all of our revenues from a limited number of customers, and the
loss of any customer or charter or vessel could result in a significant loss of
revenues and cash flow.
We have
derived, and believe that we will continue to derive, all of our revenues and
cash flow from a limited number of customers. For the year ended December 31,
2009, BP Shipping Limited, Morgan Stanley Capital Group Inc. and subsidiaries of
Overseas Shipholding Group Inc accounted for 59%, 22% and 12% of our
revenues, respectively. For the year ended December 31, 2008 BP Shipping Limited
and Morgan Stanley Capital Group Inc., accounted for 54% and 33%,
respectively. For the year ended December 31, 2007 they accounted for
58% and 24%, respectively. We currently have five principal
customers. We could lose a customer or the benefits of some or all of a charter
if:
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the
customer faces financial difficulties forcing it to declare bankruptcy or
making it impossible for it to perform its obligations under the charter,
including the payment of the agreed rates in a timely
manner;
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the
customer fails to make charter payments because of its financial
inability, disagreements with us or
otherwise;
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the
customer tries to re-negotiate the terms of the charter agreement due to
prevailing economic and market
conditions;
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the
customer exercises certain rights to terminate the charter or purchase the
vessel;
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the
customer terminates the charter because we fail to deliver the vessel
within a fixed period of time, the vessel is lost or damaged beyond
repair, there are serious deficiencies in the vessel or prolonged periods
of off-hire, or we default under the charter;
or
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a
prolonged force majeure event affecting the customer, including damage to
or destruction of relevant production facilities, war or political unrest
prevents us from performing services for that
customer.
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Please read “Item 4B: Business
Overview—Our Charters” below for further information on our
customers.
If we lose a key charter, we may be
unable to re-deploy the related vessel on terms as favorable to us due to the
long-term nature of most charters. If we are unable to re-deploy a vessel for
which the charter has been terminated, we will not receive any revenues from
that vessel, but we may be required to pay expenses necessary to maintain the
vessel in proper operating condition. Until such time as the vessel is
re-chartered, we may have to operate it in the spot market at charter rates
which may not be as favorable to us as our current charter rates. In addition,
if a customer exercises its right to purchase a vessel, we would not receive any
further revenue from the vessel and may be unable to obtain a substitute vessel
and charter. This may cause us to receive decreased revenue and cash flows from
having fewer vessels operating in our fleet. Any replacement newbuilding would
not generate revenues during its construction, and we may be unable to charter
any replacement vessel on terms as favorable to us as those of the terminated
charter. Any compensation under our charters for a purchase of the vessels may
not adequately compensate us for the loss of the vessel and related time
charter.
The loss of any of our customers, time
or bareboat charters or vessels, or a decline in payments under our charters,
could have a material adverse effect on our business, results of operations and
financial condition and our ability to make cash distributions.
Delays
in deliveries of newbuildings, our decision to cancel or our inability to
otherwise complete the acquisitions of any newbuildings we may decide to acquire
in the future, could harm our operating results and lead to the termination of
any related charters.
Any
newbuildings we may contract to acquire or order in the future could be delayed,
not completed or canceled, which would delay or eliminate our expected receipt
of revenues under any charters for such vessels. The shipbuilder or third party
seller could fail to deliver the newbuilding vessel or any other vessels we
acquire or order as may be agreed, or Capital Maritime, or relevant third party,
could cancel a purchase or a newbuilding contract because the shipbuilder has
not met its obligations, including its obligation to maintain agreed refund
guarantees in place for our benefit. For prolonged delays, the customer may
terminate the time charter.
Our receipt of newbuildings could be
delayed, canceled, or otherwise not completed because of:
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quality
or engineering problems;
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changes
in governmental regulations or maritime self-regulatory organization
standards;
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work
stoppages or other labor disturbances at the
shipyard;
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bankruptcy
or other financial or liquidity problems of the
shipbuilder;
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a
backlog of orders at the shipyard;
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political
or economic disturbances in the country or region where the vessel is
being built;
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weather
interference or catastrophic event, such as a major earthquake or
fire;
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the
shipbuilder failing to deliver the vessel in accordance with our vessel
specifications;
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our
requests for changes to the original vessel
specifications;
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shortages
of or delays in the receipt of necessary construction materials, such as
steel;
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our
inability to finance the purchase of the
vessel;
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a
deterioration in Capital Maritime’s relations with the relevant
shipbuilder; or
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our
inability to obtain requisite permits or
approvals.
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If
delivery of any vessel we contract to acquire in the future is materially
delayed, it could adversely affect our results of operations and financial
condition and our ability to make cash distributions.
We
depend on Capital Maritime and its affiliates to assist us in operating and
expanding our business.
Pursuant
to a management agreement and an administrative services agreement between us
and Capital Ship Management, Capital Ship Management provides significant
commercial and technical management services (including the commercial and
technical management of our vessels, class certifications, vessel maintenance
and crewing, purchasing and insurance and shipyard supervision) as well as
administrative, financial and other support services to us. Please read “Item
7B: Related-Party Transactions—Management Agreement” and “—Administrative
Services Agreement” below. Our operational success and ability to execute our
growth strategy will depend significantly upon Capital Ship Management’s
satisfactory performance of these services. Our business will be harmed if
Capital Ship Management fails to perform these services satisfactorily, if
Capital Ship Management cancels or materially amends either of these agreements,
or if Capital Ship Management stops providing these services to us.
In January 2010, we rechartered two
tanker vessels with subsidiaries of Capital Maritime. The performance of each
charter is guaranteed by Capital Maritime. In the future we may enter into
additional contracts with Capital Maritime to charter our vessels as they become
available for rechartering. We may also contract with Capital Maritime for it to
have newbuildings constructed on our behalf and to incur the
construction-related financing and we would purchase the vessels on or after
delivery based on an agreed-upon price. If Capital Maritime defaults under any
charter or does not perform its obligations under any contract we enter into, it
could have a material adverse effect on our business, results of operations and
financial condition and our ability to make cash distributions.
Our ability to enter into new charters
and expand our customer relationships will depend largely on our ability to
leverage our relationship with Capital Maritime and its reputation and
relationships in the shipping industry, including its ability to qualify for
long term business with certain oil majors. If Capital Maritime suffers material
damage to its reputation or relationships, it may harm our ability
to:
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renew
existing charters upon their
expiration;
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obtain
new charters;
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successfully
interact with shipyards during periods of shipyard construction
constraints;
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obtain
financing on commercially acceptable terms;
or
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maintain
satisfactory relationships with suppliers and other third
parties.
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If our ability to do any of the things
described above is impaired, it could have a material adverse effect on our
business, results of operations and financial condition and our ability to make
cash distributions.
Our
growth depends on continued growth in demand for refined products and crude oil
and the continued demand for seaborne transportation of refined products and
crude oil.
Our
growth strategy focuses on expansion in the refined product tanker and crude oil
shipping sector. Accordingly, our growth depends on continued growth in world
and regional demand for refined products and crude oil and the transportation of
refined products and crude oil by sea, which could be negatively affected by a
number of factors, including:
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the
economic and financial developments globally, including actual and
projected global economic growth.
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fluctuations
in the actual or projected price of refined products and crude
oil;
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refining
capacity and its geographical
location;
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increases
in the production of oil in areas linked by pipelines to consuming areas,
the extension of existing, or the development of new, pipeline systems in
markets we may serve, or the conversion of existing non-oil pipelines to
oil pipelines in those markets;
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decreases
in the consumption of oil due to increases in its price relative to other
energy sources, other factors making consumption of oil less attractive or
energy conservation measures;
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availability
of new, alternative energy sources;
and
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negative
or deteriorating global or regional economic or political conditions,
particularly in oil consuming regions, which could reduce energy
consumption or its growth.
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The refining industry may respond to
the economic downturn and demand weakness by reducing operating rates and by
reducing or cancelling certain investment expansion plans, including plans
for additional refining capacity. Continued reduced demand for refined products
and crude oil and the shipping of refined products or crude oil or the increased
availability of pipelines used to transport refined products or crude oil, would
have a material adverse effect on our future growth and could harm our business,
results of operations and financial condition.
Our
growth depends on our ability to expand relationships with existing customers
and obtain new customers, for which we will face substantial
competition.
Medium-
to long-term time charters and bareboat charters have the potential to provide
income at pre-determined rates over more extended periods of time. However, the
process for obtaining longer term time charters and bareboat charters is highly
competitive and generally involves a lengthy, intensive and continuous screening
and vetting process and the submission of competitive bids that often extends
for several months. In addition to the quality, age and suitability of the
vessel, longer term shipping contracts tend to be awarded based upon a variety
of other factors relating to the vessel operator further described below under
“Our vessels’ present and future employment could be adversely affected by an
inability to clear the oil majors’ risk assessment process”.
In addition to having to meet the
stringent requirements set out by charterers, it is likely that we will also
face substantial competition from a number of competitors who may have greater
financial resources, stronger reputation or experience than we do when we try to
recharter our vessels. It is also likely that we will face increased numbers of
competitors entering into our transportation sectors, including in the ice class
sector. Increased competition may cause greater price competition, especially
for medium- to long-term charters.
As a result of these factors, we may be
unable to expand our relationships with existing customers or obtain new
customers for medium- to long-term time charters or bareboat charters on a
profitable basis, if at all. Even if we are successful in employing our vessels
under longer term time charters or bareboat charters, our vessels will not be
available for trading in the spot market during an upturn in the tanker market
cycle, when spot trading may be more profitable. If we cannot successfully
employ our vessels in profitable time charters our results of operations and
operating cash flow could be adversely affected.
Our
vessels’ present and future employment could be adversely affected by an
inability to clear the oil majors’ risk assessment process.
Shipping,
and especially crude oil, refined product and chemical tankers have been, and
will remain, heavily regulated. The so called “oil majors” companies, together
with a number of commodities traders, represent a significant percentage of the
production, trading and shipping logistics (terminals) of crude oil and refined
products worldwide. Concerns for the environment have led the oil majors to
develop and implement a strict ongoing due diligence process when selecting
their commercial partners. This vetting process has evolved into a sophisticated
and comprehensive risk assessment of both the vessel operator and the vessel,
including physical ship inspections, completion of vessel inspection
questionnaires performed by accredited inspectors and the production of
comprehensive risk assessment reports. In the case of term charter
relationships, additional factors are considered when awarding such contracts,
including:
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office
assessments and audits of the vessel
operator;
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the
operator’s environmental, health and safety
record;
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compliance
with the standards of the International Maritime Organization (the “IMO”),
a United Nations agency that issues international trade standards for
shipping;
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compliance
with heightened industry standards that have been set by several oil
companies;
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shipping
industry relationships, reputation for customer service, technical and
operating expertise;
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shipping
experience and quality of ship operations, including
cost-effectiveness;
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quality,
experience and technical capability of
crews;
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the
ability to finance vessels at competitive rates and overall financial
stability;
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relationships
with shipyards and the ability to obtain suitable
berths;
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construction
management experience, including the ability to procure on-time delivery
of new vessels according to customer
specifications;
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willingness
to accept operational risks pursuant to the charter, such as allowing
termination of the charter for force majeure events;
and
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competitiveness
of the bid in terms of overall
price.
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Should
Capital Maritime and Capital Ship Management not continue to successfully clear
the oil majors’ risk assessment processes on an ongoing basis, our vessels’
present and future employment as well as our relationship with our existing
charterers and our ability to obtain new charterers, whether medium- or
long-term, could be adversely affected. Such a situation may lead to the oil
majors’ terminating existing charters and refusing to use our vessels in the
future which would adversely affect our results of operations and cash flows.
Please read “Item 4B: Business Overview—Major Oil Company Vetting Process” for
more information regarding this process.
We
may be unable to make or realize expected benefits from acquisitions, and
implementing our growth strategy through acquisitions may harm our business,
financial condition and operating results.
Our
growth strategy focuses on a gradual expansion of our fleet. Any acquisition of
a vessel may not be profitable to us at or after the time we acquire it and may
not generate cash flow sufficient to justify our investment. In addition, our
growth strategy exposes us to risks that may harm our business, financial
condition and operating results, including risks that we, or Capital Ship
Management, our manager, as the case may be, may:
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fail
to realize anticipated benefits, such as new customer relationships,
cost-savings or cash flow
enhancements;
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be
unable to hire, train or retain qualified shore and seafaring personnel to
manage and operate our growing business and
fleet;
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decrease
our liquidity by using a significant portion of our available cash or
borrowing capacity to finance
acquisitions;
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significantly
increase our interest expense or financial leverage if we incur additional
debt to finance acquisitions;
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fail
to meet the covenants under our loans regarding the fair market value of
our vessels;
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incur
or assume unanticipated liabilities, losses or costs associated with the
business or vessels acquired; or
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incur
other significant charges, such as impairment of goodwill or other
intangible assets, asset devaluation or restructuring
charges.
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Unlike
newbuildings, existing vessels typically do not carry warranties as to their
condition. While we generally inspect existing vessels prior to purchase, such
an inspection would normally not provide us with as much knowledge of a vessel’s
condition as we would possess if it had been built for us and operated by us
during its life. Repairs and maintenance costs for existing vessels are
difficult to predict and may be substantially higher than for vessels we have
operated since they were built. These costs could decrease our cash flow and
reduce our liquidity.
The
vessels that currently make up our fleet, as well as the remaining vessels we
may purchase from Capital Maritime under our omnibus agreement, have been, or
will be, built in accordance with custom designs from three different shipyards,
and the vessels from each respective shipyard are the same in all material
respects. As a result, any latent defect discovered in one vessel will likely
affect all of our vessels.
The
vessels that make up our fleet, with the exception of the M/T Amore Mio II, as
well as certain sister vessels in Capital Maritime’s fleet for which we have
been granted a right of first offer, are, or will be, based on standard designs
from Hyundai MIPO Dockyard Co., Ltd., South Korea, STX Shipbuilding Co., Ltd.,
South Korea and Baima Shipyard, China, and have been customized by Capital
Maritime, in some cases in consultation with the charterers of the vessel, and
are, or will be, uniform in all material respects. All vessels have the same or
similar equipment. As a result, any latent design defect discovered in one of
our vessels will likely affect all of our other vessels in that class. As a
result, any equipment defect discovered may affect all of our vessels. Any
disruptions in the operation of our vessels resulting from defects could
adversely affect our receipt of revenues under the charters for the vessels
affected.
Certain
design features in our vessels have been modified by Capital Maritime to enhance
the commercial capability of our vessels and have not all yet been tested. As a
result, we may encounter unforeseen expenses, complications, delays and other
unknown factors which could adversely affect our revenues.
Capital Maritime has modified certain
design features in our vessels which have not yet been tested and as a result,
they may not operate as intended. If these modifications fail to enhance the
commercial capability of our vessels as intended or interfere with the operation
of our vessels, we could face expensive and time-consuming design modifications,
delays in the operation of our vessels, damaged customer relationships and harm
to our reputation. Any disruptions in the operation of our vessels resulting
from the design modifications could adversely affect our receipt of revenues
under the charters for the vessels affected.
Acts
of piracy on ocean-going vessels have recently increased in frequency, which
could adversely affect our business.
Acts of
piracy have historically affected ocean-going vessels trading in regions of the
world such as the South China Sea and in the Gulf of Aden off the coast of
Somalia. Throughout 2008 and 2009, the frequency of piracy incidents increased
significantly, particularly in the Gulf of Aden off the coast of Somalia. If
these piracy attacks result in regions in which our vessels are deployed being
characterized by insurers as “war risk” zones, as the Gulf of Aden temporarily
was in May 2008, or Joint War Committee (“JWC”) “war and strikes” listed areas,
premiums payable for insurance coverage for our vessels could increase
significantly and such insurance coverage may be more difficult to obtain. In
addition, crew costs, including costs which may be incurred to the extent we
employ onboard security guards, could increase in such circumstances. We may not
be adequately insured to cover losses from these incidents, which could have a
material adverse effect on us. In addition, detention hijacking as a result of
an act of piracy against our vessels, or an increase in cost, or unavailability
of insurance for our vessels, could have a material adverse impact on our
business, results of operations, cash flows, financial condition and ability to
make cash distributions.
In response to piracy incidents in 2008
and 2009, particularly in the Gulf of Aden off the coast of Somalia, following
consultation with regulatory authorities, we may station armed guards on some of
our vessels in some instances. While any use of guards would be intended to
deter and prevent the hijacking of our vessels, it could also increase our risk
of liability for death or injury to persons or damage to personal property. If
we do not have adequate insurance in place to cover such liability, it could
adversely impact our business, results of operations, cash flows, financial
condition and ability to make cash distributions.
Political
instability, terrorist or other attacks, war or international hostilities can
affect the tanker industry, which may adversely affect our
business.
We
conduct most of our operations outside of the United States, and our business,
results of operations, cash flows, financial condition and ability to make cash
distributions may be adversely affected by the effects of political instability,
terrorist or other attacks, war or international hostilities. Terrorist attacks
such as the attacks on the United States on September 11, 2001, the bombings in
Spain on March 11, 2004 and in London on July 7, 2005 and the continuing
response of the United States to these attacks, as well as the threat of future
terrorist attacks, continue to contribute to world economic instability and
uncertainty in global financial markets. Future terrorist attacks could result
in increased volatility of the financial markets in the United States and
globally and could result in an economic recession in the United States or the
world. These uncertainties could also adversely affect our ability to obtain
additional financing on terms acceptable to us or at all.
In the past, political instability has
also resulted in attacks on vessels, such as the attack on the M/T Limburg in
October 2002, mining of waterways and other efforts to disrupt international
shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy
have also affected vessels trading in regions such as the South China Sea and
the Gulf of Aden off the coast of Somalia. In addition, oil facilities,
shipyards, vessels, pipelines and oil and gas fields could be targets of future
terrorist attacks. Any such attacks could lead to, among other things, bodily
injury or loss of life, vessel or other property damage, increased vessel
operational costs, including insurance costs, and the inability to transport oil
and other refined products to or from certain locations. Any of these
occurrences or other events beyond our control that adversely affect the
distribution, production or transportation of oil and other refined products to
be shipped by us could entitle our customers to terminate our charter contracts
and could have a material adverse impact on our business, financial condition,
results of operations, cash flows and ability to make cash
distributions.
Compliance
with safety and other vessel requirements imposed by classification societies
may be costly and could reduce our cash flows and ability to make
distributions.
The hull
and machinery of every commercial vessel must be certified as being “in class”
by a classification society authorized by its country of registry. The
classification society certifies that a vessel is safe and seaworthy in
accordance with the applicable rules and regulations of the country of registry
of the vessel and the Safety of Life at Sea Convention.
A vessel must undergo annual surveys,
intermediate surveys and special surveys. In lieu of a special survey, a
vessel’s machinery may be placed on a continuous survey cycle, under which the
machinery would be surveyed periodically over a five-year period. We expect our
vessels to be on special survey cycles for hull inspection and continuous survey
cycles for machinery inspection. Every vessel is also required to be drydocked
every two to three years for inspection of its underwater parts.
If any vessel does not maintain its
class or fails any annual, intermediate or special survey, the vessel will be
unable to trade between ports and will be unemployable, which could have a
material adverse effect on our business, results of operations, cash flows,
financial condition and ability to make cash distributions.
Our
operations expose us to political and governmental instability, which could harm
our business.
Our operations may be adversely
affected by changing or adverse political and governmental conditions in the
countries where our vessels are flagged or registered and in the regions where
we otherwise engage in business. Any disruption caused by these factors may
interfere with the operation of our vessels, which could harm our business,
financial condition and results of operations. In particular, we derive a
substantial portion of our revenues from shipping oil and oil products from
politically unstable regions. Past political efforts to disrupt shipping in
these regions, particularly in the Arabian Gulf, have included attacks on ships
and mining of waterways. In addition to acts of terrorism, trading in this and
other regions has also been subject, in limited instances, to piracy. Our
operations may also be adversely affected by expropriation of vessels, taxes,
regulation, tariffs, trade embargoes, economic sanctions or a disruption of or
limit to trading activities, or other adverse events or circumstances in or
affecting the countries and regions where we operate or where we may operate in
the future.
Marine
transportation is inherently risky, and an incident involving significant loss
of, or environmental contamination by, any of our vessels could harm our
reputation and business.
Our vessels and their cargoes are at
risk of being damaged or lost because of events such as:
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marine
disasters;
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bad
weather;
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mechanical
failures;
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grounding,
fire, explosions and collisions;
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piracy;
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human
error; and
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war
and terrorism.
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An accident involving any of our
vessels could result in any of the following:
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environmental
damage, including potential liabilities or costs to recover any spilled
oil or other petroleum products and to restore the eco-system where the
spill occurred;
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death
or injury to persons, loss of
property;
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delays
in the delivery of cargo;
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loss
of revenues from or termination of charter
contracts;
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governmental
fines, penalties or restrictions on conducting
business;
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higher
insurance rates; and
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damage
to our reputation and customer relationships
generally.
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Any of these results could have a
material adverse effect on our business, financial condition and operating
results.
Our
insurance may be insufficient to cover losses that may occur to our property or
result from our operations.
The
operation of ocean-going vessels in international trade is inherently risky. All
risks may not be adequately insured against, and any particular claim may not be
paid. We do not currently maintain off-hire insurance, which would cover the
loss of revenue during extended vessel off-hire periods, such as those that
occur during an unscheduled drydocking due to damage to the vessel from
accidents. Accordingly, any extended vessel off-hire, due to an accident or
otherwise, could have a material adverse effect on our business and our ability
to pay distributions to our unitholders. Any claims covered by insurance would
be subject to deductibles, and since it is possible that a large number of
claims may be brought, the aggregate amount of these deductibles could be
material. Certain of our insurance coverage is maintained through mutual
protection and indemnity associations, and as a member of such associations we
may be required to make additional payments over and above budgeted premiums if
member claims exceed association reserves. Please read “—We will be subject to
funding calls by our protection and indemnity associations, and our associations
may not have enough resources to cover claims made against them”
below.
We may be unable to procure adequate
insurance coverage at commercially reasonable rates in the future. For example,
more stringent environmental regulations have led in the past to increased costs
for, and in the future may result in the lack of availability of, insurance
against risks of environmental damage or pollution. A catastrophic oil spill or
marine disaster could exceed our insurance coverage, which could harm our
business, financial condition and operating results. In addition, certain of our
vessels are under bareboat charters with BP Shipping Limited and subsidiaries of
Overseas Shipholding Group Inc. Under the terms of these charters, the charterer
provides for the insurance of the vessel and as a result these vessels may not
be adequately insured and/or in some cases may be self-insured. Any uninsured or
underinsured loss could harm our business and financial condition. In addition,
our insurance may be voidable by the insurers as a result of certain of our
actions, such as our ships failing to maintain certification with applicable
maritime self-regulatory organizations.
Changes in the insurance markets
attributable to terrorist attacks may also make certain types of insurance more
difficult for us to obtain. In addition, the insurance that may be available to
us may be significantly more expensive than our existing coverage.
We
will be subject to funding calls by our protection and indemnity associations,
and our associations may not have enough resources to cover claims made against
them.
We are
indemnified for legal liabilities incurred while operating our vessels through
membership in P&I Associations. P&I Associations are mutual insurance
associations whose members must contribute to cover losses sustained by other
association members. The objective of a P&I Association is to provide mutual
insurance based on the aggregate tonnage of a member’s vessels entered into the
association. Claims are paid through the aggregate premiums of all members of
the association, although members remain subject to calls for additional funds
if the aggregate premiums are insufficient to cover claims submitted to the
association. Claims submitted to the association may include those incurred by
members of the association, as well as claims submitted to the association from
other P&I Associations with which our P&I Association has entered into
interassociation agreements. The P&I Associations to which we belong may not
remain viable and we may become subject to additional funding calls
which could adversely affect us.
The
maritime transportation industry is subject to substantial environmental and
other regulations, which may significantly limit our operations or increase our
expenses.
Our operations are affected by
extensive and changing international, national and local environmental
protection laws, regulations, treaties, conventions and standards in force in
international waters, the jurisdictional waters of the countries in which our
vessels operate, as well as the countries of our vessels’ registration. Many of
these requirements are designed to reduce the risk of oil spills, air emissions
and other pollution, and to reduce potential negative environmental effects
associated with the maritime industry in general. In addition, we believe
that the heightened environmental, quality and security concerns of insurance
underwriters, regulators and charterers will lead to additional regulatory
requirements, including enhanced risk assessment and security requirements and
greater inspection and safety requirements on vessels. Our compliance with
these requirements can be costly.
These requirements can affect the
resale value or useful lives of our vessels, require a reduction in cargo
capacity, ship modifications or operational changes or restrictions, lead to
decreased availability of insurance coverage for environmental matters or result
in the denial of access to certain jurisdictional waters or ports, or detention
in certain ports. Under local, national and foreign laws, as well as
international treaties and conventions, we could incur material liabilities,
including cleanup obligations and natural resource damages, in the event that
there is a release of petroleum or other hazardous substances from our vessels
or otherwise in connection with our operations. We could also become subject to
personal injury or property damage claims relating to the release of or exposure
to hazardous materials associated with our current or historic operations.
Violations of or liabilities under environmental requirements also can result in
substantial penalties, fines and other sanctions, including, in certain
instances, seizure or detention of our vessels.
We could incur significant costs,
including cleanup costs, fines, penalties, third-party claims and natural
resource damages, as the result of an oil spill or other liabilities under
environmental laws. The United States Oil Pollution Act of 1990 (“OPA 90”)
affects all vessel owners shipping oil or petroleum products to, from or within
the United States. OPA 90 allows for potentially unlimited liability without
regard to fault of owners, operators and bareboat charterers of vessels for oil
pollution in U.S. waters. Similarly, the International Convention on Civil
Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by
most countries outside of the U.S., imposes liability for oil pollution in
international waters. OPA 90 expressly permits individual states to impose their
own liability regimes with regard to hazardous materials and oil pollution
incidents occurring within their boundaries. Coastal states in the U.S. have
enacted pollution prevention liability and response laws, many providing for
unlimited liability.
In addition to complying with existing
laws and regulations and those that may be adopted, shipowners may incur
significant additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for potential spills and in
obtaining insurance coverage. Government regulation of vessels, particularly in
the areas of safety and environmental requirements, can be expected to become
stricter in the future and require us to incur significant capital expenditure
on our vessels to keep them in compliance, or even to scrap or sell certain
vessels altogether. For example, amendments to revise the regulations of MARPOL
regarding the prevention of air pollution from ships were approved by the Marine
Environment Protection Committee (“MEPC”) and formally adopted at MEPC 58th
session held in October 2008. The amendments establish a series of progressive
standards to further limit the sulphur content in fuel oil, which would be
phased in through 2020, and new tiers of nitrogen oxide (“NOx”) emission
standards for new marine diesel engines, depending on their date of
installation. The amendments are expected to enter into force under
the tacit acceptance procedure in July 2010, or on some other date determined by
the MEPC. Additionally, more stringent emission standards could apply
in coastal areas designated, pursuant to the amendments, as Emission Control
Areas.
Further legislation, or amendments to
existing legislation, applicable to international and national maritime trade is
expected over the coming years relating to environmental matters, such as ship
recycling, sewage systems, emission control (including emissions of greenhouse
gases), ballast treatment and handling.
For example, legislation and
regulations that will require more stringent controls of air emissions from
ocean-going vessels are pending or have been approved at the federal and state
level in the U.S. The relevant standards are consistent with the 2008 Amendments
to Annex VI of MARPOL. Such legislation or regulations may require significant
additional capital expenditures (such as additional costs required for the
installation of control equipment on each vessel) or operating expenses (such as
increased costs for low-sulfur fuel) in order for us to maintain our vessels’
compliance with international and/or national regulations.
In addition, various jurisdictions,
including the IMO and the United States, have proposed or implemented
requirements governing the management of ballast water to prevent the
introduction of non-indigenous species considered to be invasive. The IMO has
adopted the International Convention for the Control and Management of Ships’
Ballast Water and Sediments (the “BWM Convention”), which calls for a phased
introduction of mandatory ballast water exchange requirements, to be replaced in
time with mandatory concentration limits. The BWM Convention will enter into
force 12 months after it has been adopted by 30 states, the combined merchant
fleets of which represent not less than 35% of the gross tonnage of the world’s
merchant shipping tonnage. As of December 31, 2009, 21 states, representing
approximately 22.3% of the world’s merchant shipping tonnage, have ratified the
BWM Convention. We may incur additional costs to install the relevant control
equipment on our vessels in order to comply with the new standards.
In the United States, ballast water
management legislation has been enacted in several states, and federal
legislation is currently pending in the U.S. Congress. In addition, the U.S.
Environmental Protection Agency has also adopted a rule which requires
commercial vessels to obtain a “Vessel General Permit” from the U.S. Coast Guard
in compliance with the Federal Water Pollution Control Act (the “Clean Water
Act”) regulating the discharge of ballast water and other discharges into U.S.
waters. Significant expenditures for the installation of additional equipment or
new systems on board our vessels may be required in order to comply with
existing or future regulations regarding ballast water management in these other
jurisdictions, along with the potential for increased port disposal
costs.
Other requirements may also come into
force regarding the protection of endangered species which could lead to changes
in the routes our vessels follow or in trading patterns generally and thus to
additional capital expenditures. Additionally, new environmental regulations
with respect to greenhouse gas emissions and preservation of biodiversity
amongst others, are expected to come into effect following the agreement and
execution of a G8 environmental agreement. The next meeting of the G8 to discuss
such matters is scheduled to take place in Canada in June 2010.
Furthermore, as a result of marine
accidents we believe that regulation of the shipping industry will continue to
become more stringent and more expensive for us and our competitors. In recent
years, the IMO and EU have both accelerated their existing non-double-hull
phase-out schedules in response to highly publicized oil spills and other
shipping incidents involving companies unrelated to us. Future incidents may
result in the adoption of even stricter laws and regulations, which could limit
our operations or our ability to do business and which could have a material
adverse effect on our business and financial results.
Please read “Item 4B: Business
Overview—Regulation” below for a more detailed discussion of the regulations
applicable to our vessels.
The
crew employment agreements manning agents enter into on behalf of Capital
Maritime or any of its affiliates, including Capital Ship Management, our
manager, may not prevent labor interruptions and the failure to renegotiate
these agreements successfully in the future may disrupt our operations and
adversely affect our cash flows.
The crew
employment agreements that manning agents enter into on behalf of Capital
Maritime or any of its affiliates, including Capital Ship Management, our
manager, may not prevent labor interruptions and are subject to renegotiation in
the future. Any labor interruptions, including due to a failure to renegotiate
employment agreements with our crew members successfully could disrupt our
operations and could adversely affect our business, financial condition and
results of operations.
Arrests
of our vessels by maritime claimants could cause a significant loss of earnings
for the related off-hire period.
Crew
members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien by “arresting” or “attaching” a vessel through
foreclosure proceedings. The arrest or attachment of one or more of our vessels
could result in a significant loss of earnings for the related off-hire period.
In addition, in jurisdictions where the “sister ship” theory of liability
applies, a claimant may arrest the vessel which is subject to the claimant’s
maritime lien and any “associated” vessel, which is any vessel owned or
controlled by the same owner. In countries with “sister ship” liability laws,
claims might be asserted against us or any of our vessels for liabilities of
other vessels that we own.
Risks
Inherent in an Investment in Us
Capital
Maritime and its affiliates may engage in competition with us.
Pursuant
to the omnibus agreement that we and Capital Maritime have entered into, Capital
Maritime and its controlled affiliates (other than us, our general partner and
our subsidiaries) have agreed not to acquire, own or operate medium- range
tankers under time charters of two or more years without the consent of our
general partner. The omnibus agreement, however, contains significant exceptions
that may allow Capital Maritime or any of its controlled affiliates to compete
with us, which could harm our business. Please read “Item 7B:
Related-Party Transactions—Omnibus Agreement—Noncompetition”.
Unitholders
have limited voting rights and our partnership agreement restricts the voting
rights of unitholders owning 5% or more of our units.
Holders
of common units have only limited voting rights on matters affecting our
business. We hold a meeting of the limited partners every year to elect one or
more members of our board of directors and to vote on any other matters that are
properly brought before the meeting. Common unitholders elect only four of the
seven members of our board of directors. The elected directors will be elected
on a staggered basis and will serve for three-year terms. Our general partner in
its sole discretion has the right to appoint the remaining three directors and
to set the terms for which those directors will serve. The partnership agreement
also contains provisions limiting the ability of unitholders to call meetings or
to acquire information about our operations, as well as other provisions
limiting the unitholders’ ability to influence the manner or direction of
management. Unitholders have no right to elect our general partner and our
general partner may not be removed except by a vote of the holders of at least
66⅔% of the outstanding units, including any units owned by our general partner
and its affiliates, voting together as a single class and a majority vote of our
board of directors.
Our partnership agreement further
restricts unitholders’ voting rights by providing that if any person or group,
other than our general partner, its affiliates, their transferees and persons
who acquired such units with the prior approval of our board of directors, owns
beneficially 5% or more of any class of units then outstanding, any such units
owned by that person or group in excess of 4.9% may not be voted on any matter
and will not be considered to be outstanding when sending notices of a meeting
of unitholders, calculating required votes, except for purposes of nominating a
person for election to our board, determining the presence of a quorum or for
other similar purposes, unless required by law. The voting rights of any such
unitholders in excess of 4.9% will be redistributed pro rata among the other
unitholders holding less than 4.9% of the voting power of all classes of units
entitled to vote. As an affiliate of our general partner, Capital Maritime is
not subject to this limitation. Capital Maritime owns a 46.6% interest in us,
including 11,304,651 common units and a 2% interest in us through its ownership
of our general partner
Our
general partner and its other affiliates own a controlling interest in us and
have conflicts of interest and limited fiduciary and contractual duties, which
may permit them to favor their own interests to your detriment.
Capital
Maritime currently owns a 46.6% interest in us, including 11,304,651 common
units and a 2% interest in us through its ownership of our general partner. The
common units owned by Capital Maritime have the same rights as our other
outstanding common units. Our general partner effectively controls our
day-to-day affairs consistent with policies and procedures adopted by and
subject to the direction of our board of directors. Our general partner and its
affiliates and our directors have a fiduciary duty to manage us in a manner
beneficial to us and our unitholders. However, the officers of our general
partner have a fiduciary duty to manage our general partner in a manner
beneficial to Capital Maritime. Furthermore, all of the officers of our general
partner and certain of our directors are directors or officers of Capital
Maritime and its affiliates, and as such they have fiduciary duties to Capital
Maritime that may cause them to pursue business strategies that
disproportionately benefit Capital Maritime or which otherwise are not in the
best interests of us or our unitholders. Conflicts of interest may arise between
Capital Maritime and its affiliates, including our general partner and its
officers, on the one hand, and us and our unitholders, on the other hand. As a
result of these conflicts, our general partner and its affiliates may favor
their own interests over the interests of our unitholders. Please read “—Our
partnership agreement limits the fiduciary duties of our general partner and our
directors to our unitholders and restricts the remedies available to unitholders
for actions taken by our general partner or our directors” below. These
conflicts include, among others, the following situations:
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neither
our partnership agreement nor any other agreement requires our general
partner or Capital Maritime or its affiliates to pursue a business
strategy that favors us or utilizes our assets, and Capital Maritime’s
officers and directors have a fiduciary duty to make decisions in the best
interests of the unitholders of Capital Maritime, which may be contrary to
our interests;
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the
executive officers of our general partner and three of our directors also
serve as executive officers and/or directors of Capital
Maritime;
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our
general partner and our board of directors are allowed to take into
account the interests of parties other than us, such as Capital Maritime,
in resolving conflicts of interest, which has the effect of limiting their
fiduciary duties to our
unitholders;
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our
general partner and our directors have limited their liabilities and
reduced their fiduciary duties under the laws of the Marshall Islands,
while also restricting the remedies available to our unitholders, and, as
a result of purchasing our units, unitholders are treated as having agreed
to the modified standard of fiduciary duties and to certain actions that
may be taken by our general partner and our directors, all as set forth in
the partnership agreement;
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our
general partner and our board of directors will be involved in determining
the amount and timing of our asset purchases and sales, capital
expenditures, borrowings, and issuances of additional partnership
securities and reserves, each of which can affect the amount of cash that
is available for distribution to our
unitholders;
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our
general partner may have substantial influence over our board of
directors’ decision to cause us to borrow funds in order to permit the
payment of cash distributions, even if the purpose or effect of the
borrowing is to make a distribution on any subordinated units or to make
incentive distributions;
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our
general partner is entitled to reimbursement of all reasonable costs
incurred by it and its affiliates for our
benefit;
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our
partnership agreement does not restrict us from paying our general partner
or its affiliates for any services rendered to us on terms that are fair
and reasonable or entering into additional contractual arrangements with
any of these entities on our behalf;
and
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our
general partner may exercise its right to call and purchase our
outstanding units if it and its affiliates own more than 80% of our common
units.
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Although a majority of our directors
will over time be elected by common unitholders, our general partner will likely
have substantial influence on decisions made by our board of directors. Please
read “Item 7B: Related-Party Transactions” below.
The
vote of a majority of our common unitholders is required to amend the terms of
our partnership agreement. Capital Maritime currently owns 45.6% of our common
units and can significantly impact any vote under the terms of our partnership
agreement which may allow Capital Maritime to favor its interests and may
significantly affect your rights under the partnership agreement. In addition,
Capital Maritime is not subject to the limitations on voting rights imposed on
our other limited partners.
On
January 30, 2009, we announced the payment of an exceptional non-recurring
distribution of $1.05 per unit for the fourth quarter of 2008, bringing annual
distributions to unitholders to $2.27 per unit for the year ended December 31,
2008, a level which under the terms of our partnership agreement resulted in the
early termination of the subordination period and the automatic conversion of
the subordinated units into common units. Following such conversion, Capital
Maritime owns a 46.6% interest in us, including 11,304,651common units and a 2%
interest in us through its ownership of our general partner. The common units
owned by Capital Maritime have the same rights as our other outstanding common
units.
A
majority of common units (or in certain cases a higher percentage), of which
Capital Maritime owns 45.6%, are required in order to amend the terms of the
partnership agreement or to reach certain decisions or actions,
including:
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amendments
to the definition of available cash, operating surplus, adjusted operating
surplus;
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changes
in our cash distribution policy;
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elimination
of the obligation to pay the minimum quarterly
distribution;
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elimination
of the obligation to hold an annual general
meeting;
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removal
of any appointed director for
cause;
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transfer
of the general partner interest;
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transfer
of the incentive distribution
rights;
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the
ability of the board to sell, exchange or otherwise dispose of all or
substantially all of our assets;
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resolution
of conflicts of interest;
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withdrawal
of the general partner;
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removal
of the general partner;
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dissolution
of the partnership;
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change
to the quorum requirements;
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approval
of merger or consolidation; and
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any
amendment to the partnership
agreement.
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In
addition, prior to the conversion of our subordinated units, any shortfall in
the payment of the minimum quarterly distribution was borne first by the owners
of the subordinated units. Following such conversion the risk will be borne only
by our common unitholders.
Our partnership agreement further
restricts unitholders’ voting rights by providing that if any person, other than
our general partner or its affiliates, their transferees and persons who acquire
units with the prior approval of our board of directors owns beneficially 5% or
more of any class of units then outstanding, any such units owned by that person
or group in excess of 4.9% may not be voted on any matter and that the voting
rights of any such unitholders in excess of 4.9% will be redistributed pro rata
among the other unitholders holding less than 4.9% of the voting power of all
classes of units entitled to vote. See “—Unitholders have limited voting rights
and our partnership agreement restricts the voting rights of unitholders owning
5% or more of our units” above for more information. As an affiliate of our
general partner, Capital Maritime is not subject to this limitation; and as our
largest unitholder, may propose amendments to the partnership agreement that may
favor its interests over other unitholders’ and which
may change or limit other unitholders’ rights under
the partnership agreement.
We
currently do not have any officers and rely, and expect to continue to rely,
solely on officers of our general partner, who face conflicts in the allocation
of their time to our business.
Our board
of directors has not exercised its power to appoint officers of Capital Product
Partners L.P. to date, and as a result, we rely, and expect to continue to rely,
solely on the officers of our general partner, who are not required to work
full-time on our affairs and who also work for affiliates of our general
partner, including Capital Maritime. For example, our general partner’s Chief
Executive Officer and Chief Financial Officer is also an executive officer of
Capital Maritime. The affiliates of our general partner conduct substantial
businesses and activities of their own in which we have no economic interest. As
a result, there could be material competition for the time and effort of the
officers of our general partner who also provide services to our general
partner’s affiliates, which could have a material adverse effect on our
business, results of operations and financial condition.
Our
partnership agreement limits our general partner’s and our directors’ fiduciary
duties to our unitholders and restricts the remedies available to unitholders
for actions taken by our general partner or our directors.
Our
partnership agreement contains provisions that reduce the standards to which our
general partner and directors would otherwise be held by Marshall Islands
law. For example, our partnership agreement:
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permits
our general partner to make a number of decisions in its individual
capacity, as opposed to in its capacity as our general partner. Where our
partnership agreement permits, our general partner may consider only the
interests and factors that it desires, and in such cases it has no duty or
obligation to give any consideration to any interest of, or factors
affecting us, our affiliates or our unitholders. Decisions made by our
general partner in its individual capacity will be made by its sole owner,
Capital Maritime. Specifically, pursuant to our partnership agreement, our
general partner will be considered to be acting in its individual capacity
if it exercises its call right, pre-emptive rights or registration rights,
consents or withholds consent to any merger or consolidation of the
partnership, appoints any directors or votes for the election of any
director, votes or refrains from voting on amendments to our partnership
agreement that require a vote of the outstanding units, voluntarily
withdraws from the partnership, transfers (to the extent permitted under
our partnership agreement) or refrains from transferring its units,
general partner interest or incentive distribution rights or votes upon
the dissolution of the partnership;
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provides
that our general partner and our directors are entitled to make other
decisions in “good faith” if they reasonably believe that the decision is
in our best interests;
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generally
provides that affiliated transactions and resolutions of conflicts of
interest not approved by the conflicts committee of our board of directors
and not involving a vote of unitholders must be on terms no less favorable
to us than those generally being provided to or available from unrelated
third parties or be “fair and reasonable” to us and that, in determining
whether a transaction or resolution is “fair and reasonable”, our board of
directors may consider the totality of the relationships between the
parties involved, including other transactions that may be particularly
advantageous or beneficial to us;
and
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provides
that neither our general partner and its officers nor our directors will
be liable for monetary damages to us, our limited partners or assignees
for any acts or omissions unless there has been a final and non-appealable
judgment entered by a court of competent jurisdiction determining that our
general partner or directors or its officers or directors or those other
persons engaged in actual fraud or willful
misconduct.
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In order to become a limited partner of
our partnership, a unitholder is required to agree to be bound by the provisions
in the partnership agreement, including the provisions discussed
above.
Fees
and cost reimbursements paid to Capital Ship Management for services provided to
us and certain of our subsidiaries are substantial, may fluctuate, and will
reduce our cash available for distribution to unitholders. Such fees and cost
reimbursements, the amount of which is determined by Capital Ship Management,
may increase as the vessel costs environment continues to increase or due to
other unforeseen events, and may change upon the expiration of the management
and administrative agreements currently in place.
We pay a
fixed daily fee for an initial term of approximately five years from the time we
take delivery of each vessel for services provided to us by Capital Ship
Management, and we reimburse Capital Ship Management for all expenses it incurs
on our behalf. The fixed daily fee to be paid to Capital Ship Management
includes all costs incurred in providing certain commercial and technical
management services to us, including vessel maintenance, crewing, purchasing and
insurance and also includes the expenses for each vessel’s next scheduled
special or intermediate survey, as applicable, and related
drydocking. In addition to the fixed daily fees payable under the
management agreement, Capital Ship Management is entitled to supplementary
remuneration for additional fees and costs of any direct and indirect
expenses it reasonably incurs in providing these services which may vary from
time to time, and which includes, amongst others, certain costs associated with
the vetting of our vessels, repairs related to unforeseen events and insurance
deductibles in accordance with the terms of the management agreement (the
“additional fees”). For the year ended December 31, 2009 such fees amounted to
approximately $3.0 million as compared to $1.0 million for the year ended
December 31, 2008. Such costs may increase further to reflect unforeseen events
and the continuing inflationary vessel costs environment. In addition, Capital
Ship Management provides us with administrative services, including audit,
legal, banking, investor relations, information technology and insurance
services, pursuant to an administrative services agreement with an initial term
of five years from the date of our initial public offering, and we reimburse
Capital Ship Management for all costs and expenses reasonably incurred by it in
connection with the provision of those services. Costs for these services are
not fixed and fluctuate depending on our requirements.
Going forward, when we acquire new
vessels or when the respective management agreements for our vessels expire, we
will have to enter into new agreements with Capital Ship Management or a third
party for the provision of the above services. It is possible that any such new
agreement may not be on the same or similar terms as our existing agreements,
and that the level of our operating costs may change following any such renewal.
Any increase in the costs and expenses associated with the provision of these
services by our manager in the future, such as the costs of crews for our time
chartered vessels and insurance, will lead to an increase in the fees we will
have to pay to Capital Ship Management under any new agreements we enter into.
The payment of fees to Capital Ship Management and reimbursement of expenses to
Capital Ship Management could adversely affect our ability to pay cash
distributions.
Our
partnership agreement contains provisions that may have the effect of
discouraging a person or group from attempting to remove our current management
or our general partner, and even if public unitholders are dissatisfied, they
will be unable to remove our general partner without Capital Maritime’s consent,
unless Capital Maritime’s ownership share in us is decreased, all of which could
diminish the trading price of our units.
Our
partnership agreement contains provisions that may have the effect of
discouraging a person or group from attempting to remove our current management
or our general partner:
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The
unitholders will be unable to remove our general partner without its
consent because our general partner and its affiliates own sufficient
units to be able to prevent its removal. The vote of the holders of at
least 66 2/3% of all outstanding units voting together as a single class
and a majority vote of our board of directors is required to remove the
general partner. As of December 31, 2009, Capital Maritime owned a 46.6%
interest in us, including 11,304,651common units and a 2% interest in us
through its ownership of our general
partner.
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Common
unitholders elect only four of the seven members of our board of
directors. Our general partner in its sole discretion has the right to
appoint the remaining three directors. Subordinated unitholders do not
elect any directors. We do not currently have any outstanding subordinated
units.
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Election
of the four directors elected by common unitholders is staggered, meaning
that the members of only one of three classes of our elected directors are
selected each year. In addition, the directors appointed by our general
partner will serve for terms determined by our general
partner.
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Our
partnership agreement contains provisions limiting the ability of
unitholders to call meetings of unitholders, to nominate directors and to
acquire information about our operations as well as other provisions
limiting the unitholders’ ability to influence the manner or direction of
management.
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Unitholders’
voting rights are further restricted by the partnership agreement
provision providing that if any person or group, other than our general
partner, its affiliates, their transferees, and persons who acquired such
units with the prior approval of our board of directors, owns beneficially
5% or more of any class of units then outstanding, any such units owned by
that person or group in excess of 4.9% may not be voted on any matter and
will not be considered to be outstanding when sending notices of a meeting
of unitholders, calculating required votes, except for purposes of
nominating a person for election to our board, determining the presence of
a quorum or for other similar purposes, unless required by law. The voting
rights of any such unitholders in excess of 4.9% will be redistributed pro
rata among the other common unitholders holding less than 4.9% of the
voting power of all classes of units entitled to
vote.
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We
have substantial latitude in issuing equity securities without unitholder
approval.
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The effect of these provisions may be
to diminish the price at which our units will trade.
The
control of our general partner may be transferred to a third party without
unitholder consent.
Our
general partner may transfer its general partner interest to a third party in a
merger or in a sale of all or substantially all of its assets without the
consent of the unitholders. In addition, our partnership agreement does not
restrict the ability of the members of our general partner from transferring
their respective membership interests in our general partner to a third party.
Any such change in control of our general partner may affect the way we and our
operations are managed which could have a material adverse effect on our
business, results of operations or financial condition and our ability to make
cash distributions.
Substantial
future sales of our units in the public market could cause the price of our
units to fall.
We have
granted registration rights to Capital Maritime and certain affiliates of
Capital Maritime. These unitholders have the right, subject to some conditions,
to require us to file registration statements covering any of our common,
subordinated or other equity securities owned by them at such time or to include
those securities in registration statements that we may file for ourselves or
other unitholders. There are currently no outstanding subordinated units. As of
December 31, 2009 Capital Maritime owned 11,304,651 common units registered
under our Registration Statement on Form F-3 dated August 29, 2008, as amended,
and certain incentive distribution rights. By exercising their registration
rights or selling a large number of units or other securities, as the case may
be, these unitholders could cause the price of our units to
decline.
We
may issue additional equity securities without unitholder approval, which
would dilute existing unitholders’ ownership
interests.
We may,
without the approval of our unitholders, issue an unlimited number of additional
units or other equity securities, including securities to Capital Maritime. In
particular, we have financed a portion of the purchase price of two
non-contracted vessels we acquired from Capital Maritime during 2008 through the
issuance of additional common units to Capital Maritime. The issuance by us of
additional units or other equity securities of equal or senior rank will have
the following effects:
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our
unitholders’ proportionate ownership interest in us will
decrease;
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the
amount of cash available for distribution on each unit may
decrease;
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the
relative voting strength of each previously outstanding unit may be
diminished; and
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the
market price of the units may
decline.
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In
establishing cash reserves, our board of directors may reduce the amount of cash
available for distribution to unitholders.
Our
partnership agreement requires our general partner to deduct from operating
surplus cash reserves that it determines are necessary to fund our future
operating expenditures. These reserves will also affect the amount of cash
available for distribution to our unitholders. See “—Risks Inherent in Our
Business—We must make substantial capital expenditures to maintain the operating
capacity of our fleet, which will reduce our cash available for distribution. In
addition, each quarter our board of directors is required to deduct estimated
maintenance and replacement capital expenditures from operating surplus, which
may result in less cash available to unitholders than if actual maintenance and
replacement capital expenditures were deducted”, our partnership agreement
requires our board of directors each quarter to deduct from operating surplus
estimated maintenance and replacement capital expenditures, as opposed to actual
expenditures, which could reduce the amount of available cash for distribution.
The amount of estimated maintenance and replacement capital expenditures
deducted from operating surplus is subject to review and change by our board of
directors at least once a year, provided that any change must be approved by the
conflicts committee of our board of directors.
Our
general partner has a limited call right that may require unitholders to
sell units at an undesirable time or price.
If at any
time our general partner and its affiliates own more than 80% of the common
units our general partner will have the right, which it may assign to any of its
affiliates or to us, but not the obligation, to acquire all, but not less than
all, of the common units or subordinated units held by unaffiliated persons at a
price not less than their then-current market price. As a result, unitholders
may be required to sell units at an undesirable time or price and may not
receive any return on their investment. Unitholders may also incur a tax
liability upon a sale of such units.
Unitholders
may not have limited liability if a court finds that unitholder action
constitutes control of our business.
As a
limited partner in a partnership organized under the laws of the Marshall
Islands, a unitholder could be held liable for our obligations to the
same extent as a general partner if it participates in the “control” of our
business. Our general partner generally has unlimited liability for the
obligations of the partnership, such as its debts and environmental liabilities,
except for those contractual obligations of the partnership that are expressly
made without recourse to our general partner. In addition, the limitations on
the liability of holders of limited partner interests for the obligations of a
limited partnership have not been clearly established in some jurisdictions in
which we do business.
We
can borrow money to pay distributions, which would reduce the amount of credit
available to operate our business.
Our
partnership agreement will allow us to make working capital borrowings to pay
distributions. Accordingly, we can make distributions on all our units even
though cash generated by our operations may not be sufficient to pay such
distributions. Any working capital borrowings by us to make distributions will
reduce the amount of working capital borrowings we can make for operating our
business. For more information, please read “Item 5B: Operating and Financial
Review and Prospects—Liquidity and Capital Resources—Borrowings”.
Increases
in interest rates may cause the market price of our units to
decline.
An
increase in interest rates may cause a corresponding decline in demand for
equity investments in general, and in particular for yield based equity
investments such as our units. Any such increase in interest rates or reduction
in demand for our units resulting from other relatively more attractive
investment opportunities may cause the trading price of our units to
decline.
Unitholders
may have liability to repay distributions.
Under
some circumstances, unitholders may have to repay amounts wrongfully returned or
distributed to them. Under the Marshall Islands Limited Partnership Act (the
“Marshall Islands Act”), we may not make a distribution to unitholders if
the distribution would cause our liabilities to exceed the fair value of our
assets. Marshall Islands law provides that for a period of three years from the
date of the impermissible distribution, limited partners who received the
distribution and who knew at the time of the distribution that it violated
Marshall Islands law will be liable to the limited partnership for the
distribution amount. Assignees who become substituted limited partners are
liable for the obligations of the assignor to make contributions to the
partnership that are known to the assignee at the time it became a limited
partner and for unknown obligations if the liabilities could be determined from
the partnership agreement. Liabilities to partners on account of their
partnership interest and liabilities that are non-recourse to the partnership
are not counted for purposes of determining whether a distribution is
permitted.
We
have a limited operating history, which makes it more difficult to accurately
forecast our future results and may make it difficult for investors to evaluate
our business and our future prospects, both of which will increase the risk of
your investment.
We were formed as an independent master
limited partnership on January 16, 2007. Only six of the vessels in our current
fleet had been delivered to the relevant vessel-owning subsidiaries as of
December 31, 2006, and only two were in operation for the full year then ended.
Moreover, as these vessels were operated as part of Capital Maritime’s fleet
during the reporting period, the vessels were operated in a different manner
than they are currently operated, and thus their historical results may not be
indicative of their future results. Because of our limited operating history, we
lack extended historical financial and operational data, making it more
difficult for an investor to evaluate our business, forecast our future revenues
and other operating results, and assess the merits and risks of an investment in
our common units. This lack of information will increase the risk of your
investment. Moreover, you should consider and evaluate our prospects in light of
the risks and uncertainties frequently encountered by companies with a limited
operating history. These risks and difficulties include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to older companies with longer
operating histories. Our failure to address these risks and difficulties
successfully could materially harm our business and operating
results.
We
will incur significant costs in complying with the requirements of the
Sarbanes-Oxley Act of 2002. If management is unable to continue to provide
reports as to the effectiveness of our internal control over financial reporting
or our independent registered public accounting firm is unable to continue to
provide us with unqualified attestation reports as to the effectiveness of our
internal control over financial reporting, investors could lose confidence in
the reliability of our financial statements, which could result in a decrease in
the value of our common units.
As a
publicly traded limited partnership, we are required to comply with the SEC’s
reporting requirements and with corporate governance and related requirements of
the U.S. Sarbanes-Oxley Act, the SEC and the Nasdaq Global Market, on which our
common units are listed. Section 404 of the Sarbanes−Oxley Act of 2002 (“SOX
404”) requires that we evaluate and determine the effectiveness of our internal
control over financial reporting on an annual basis and include in our reports
filed with the SEC our management’s assessment of the effectiveness of our
internal control over financial reporting and a related attestation of our
independent registered public accounting firm. As our manager, Capital Maritime
provides substantially all of our financial reporting, and we depend on the
procedures they have in place. If, in such future annual reports on Form 20-F,
our management cannot provide a report as to the effectiveness of our internal
control over financial reporting or our independent registered public accounting
firm is unable to provide us with an unqualified attestation report as to the
effectiveness of our internal control over financial reporting as required by
Section 404, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our common
units..
We have and expect we will continue to
have to dedicate a significant amount of time and resources to ensure compliance
with the regulatory requirements of SOX 404. We will continue to work with our
legal, accounting and financial advisors to identify any areas in which changes
should be made to our financial and management control systems to manage our
growth and our obligations as a public company. However, these and other
measures we may take may not be sufficient to allow us to satisfy our
obligations as a public company on a timely and reliable basis. If we have a
material weakness in our internal control over financial reporting, we may not
detect errors on a timely basis and our financial statements may be materially
misstated. We have incurred and will continue to incur legal, accounting and
other expenses in complying with these and other applicable regulations. We
anticipate that our incremental general and administrative expenses as a
publicly traded limited partnership taxed as a corporation for U.S. federal
income tax purposes will include costs associated with annual reports to
unitholders, tax returns, investor relations, registrar and transfer agent’s
fees, incremental director and officer liability insurance costs and director
compensation.
We
have been organized as a limited partnership under the laws of the Marshall
Islands, which does not have a well developed body of partnership
law.
Our
partnership affairs are governed by our partnership agreement and by the
Marshall Islands Act. The provisions of the Marshall Islands Act resemble
provisions of the limited partnership laws of a number of states in the United
States, most notably the State of Delaware. The Marshall Islands Act also
provides that it is to be applied and construed to make it uniform with the laws
of the State of Delaware Revised Uniform Partnership Act and, so long as it does
not conflict with the Marshall Islands Act or decisions of the Marshall Islands
courts, interpreted according to the non-statutory law (or case law) of the
State of Delaware. There have been, however, few, if any, court cases in the
Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware,
which has a fairly well-developed body of case law interpreting its limited
partnership statute. Accordingly, we cannot predict whether Marshall Islands
courts would reach the same conclusions as the courts in Delaware. For example,
the rights of our unitholders and the fiduciary responsibilities of our general
partner under Marshall Islands law are not as clearly established as under
judicial precedent in existence in Delaware. As a result, unitholders may have
more difficulty in protecting their interests in the face of actions by our
general partner and its officers and directors than would unitholders of a
limited partnership formed in the United States.
Because
we are organized under the laws of the Marshall Islands, it may be difficult to
serve us with legal process or enforce judgments against us, our directors or
our management.
We are organized under the laws of the
Marshall Islands as a limited partnership. Our general partner is
organized under the laws of the Marshall Islands as a limited liability company.
The Marshall Islands has a less developed body of securities laws as compared to
the United States and provides protections for investors to a significantly
lesser extent.
Most of
our directors and the directors and officers of our general partner and those of
our subsidiaries are residents of countries other than the United
States. Substantially all of our and our subsidiaries’ assets and a
substantial portion of the assets of our directors and the directors and
officers of our general partner are located outside the United States. Our
business is operated primarily from our office in Greece. As a result, it may be
difficult or impossible for unitholders or others to effect service of process
within the United States upon us, our directors, our general partner, our
subsidiaries or the directors and officers of our general partner or enforce
against us or them judgments obtained in United States courts if they believe
that their rights have been infringed under securities laws or otherwise,
including judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state of the United States. There is
also uncertainty as to whether the courts of the Marshall Islands and of other
jurisdictions would (1) recognize or enforce against us, our directors, our
general partner’s directors or officers judgments of courts of the United States
based on civil liability provisions of applicable U.S. federal and state
securities laws; or (2) impose liabilities against us, our directors, our
general partner or our general partner’s directors and officers in original
actions brought in the Marshall Islands, based on these laws.
Tax
Risks
In addition to the following risk
factors, you should read “Item 10E: Taxation” for a more complete discussion of
the expected material U.S. federal and non-U.S. income tax considerations
relating to us and the ownership and disposition of our units.
U.S.
tax authorities could treat us as a “passive foreign investment company”, which
could have adverse U.S. federal income tax consequences to U.S.
unitholders.
A foreign entity taxed as a corporation
for U.S. federal income tax purposes will be treated as a “passive foreign
investment company” (a “PFIC”), for U.S. federal income tax purposes, (x) if at
least 75.0% of its gross income for any taxable year consists of certain types
of “passive income”, or (y) at least 50.0% of the average value of the entity’s
assets produce or are held for the production of those types of “passive
income”. For purposes of these tests, “passive income” includes dividends,
interest, gains from the sale or exchange of investment property, and rents and
royalties other than rents and royalties that are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute “passive income”. U.S. unitholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect to the income
derived by the PFIC, the distributions they receive from the PFIC, and the gain,
if any, they derive from the sale or other disposition of their units in the
PFIC.
Based on our current and projected
method of operation, we believe that we are not currently PFIC nor do we expect
to become a PFIC. We intend to treat our income from time and spot chartering
activities as non-passive income, and the vessels engaged in those activities as
non-passive assets, for PFIC purposes. However, no assurance can be
given that the Internal Revenue Service (the “IRS”) will accept this position.
There are legal uncertainties involved in this determination, because there is
no direct legal authority under the PFIC rules addressing our current and
projected future operations. Moreover, a recent case by the U.S.
Court of Appeals for the Fifth Circuit held that, contrary to the position of
the IRS in that case, and for purposes of a different set of rules under the
Internal Revenue Code of 1986, as amended (the “Code”), income received under a
time charter of vessels should be treated as rental income rather than services
income. If the reasoning of this case were extended to the PFIC
context, the gross income we derive or are deemed to derive from our time and
spot chartering activities would be treated as rental income, and we would
probably be a PFIC. Accordingly, no assurance can be given that the
IRS or a United States court will accept the position that we are not a PFIC,
and there is a risk, particularly in light of the aforementioned case, that the
IRS or a United States court could determine that we are a
PFIC. Moreover, no assurance can be given that we would not
constitute a PFIC for any future taxable year if there were to be changes in our
assets, income or operations. See “Item 10E: Taxation—PFIC Status and
Significant Tax Consequences”.
The
preferential tax rates applicable to qualified dividend income are temporary,
and the enactment of previously proposed legislation could affect whether
dividends paid by us constitute qualified dividend income eligible for the
preferential rate.
Certain of our distributions may be
treated as qualified dividend income eligible for preferential rates of U.S.
federal income tax to U.S. individual unitholders (and certain other U.S.
unitholders). In the absence of legislation extending the term for these
preferential tax rates, all dividends received by such U.S. taxpayers in tax
years beginning on January 1, 2011 or later will be taxed at ordinary graduated
tax rates. Please read “Item 10E: Taxation—U.S. Federal Income Taxation of U.S.
Holders—Distributions”.
In addition, previously proposed
legislation would deny the preferential rate of U.S. federal income tax
currently imposed on qualified dividend income with respect to dividends
received from a non-U.S. corporation, unless the non-U.S. corporation either is
eligible for benefits of a comprehensive income tax treaty with the United
States or is created or organized under the laws of a foreign country that has a
comprehensive income tax system. Because the Marshall Islands has not entered
into a comprehensive income tax treaty with the United States and imposes only
limited taxes on entities organized under its laws, it is unlikely that we could
satisfy either of these requirements. Consequently, if this legislation were
enacted the preferential tax rates of federal income tax discussed under “Item
10E: Taxation—U.S. Federal Income Taxation of U.S. Holders—Distributions” herein
may no longer be applicable to distributions received from us. As of the date
hereof, it is not possible to predict with any certainty whether this previously
proposed legislation will be reintroduced and enacted.
We
may have to pay tax on United States source income, which would reduce our
earnings.
Under the Code, 50.0% of the gross
shipping income of a vessel-owning or chartering corporation that is
attributable to transportation that both begins or ends, but that does not begin
and end, in the U.S. is characterized as U.S. source shipping income and such
income generally is subject to a 4.0% U.S. federal income tax without allowance
for deduction, unless that corporation qualifies for exemption from tax under
Section 883 of the Code. We believe that we and each of our subsidiaries will
qualify for this statutory tax exemption, and we will take this position for
U.S. federal income tax return reporting purposes. However, there are factual
circumstances, including some that may be beyond our control, which could cause
us to lose the benefit of this tax exemption. In addition, our conclusion that
we currently qualify for this exemption is based upon legal authorities that do
not expressly contemplate an organization structure such as ours. Although we
have elected to be treated as a corporation for U.S. federal income tax
purposes, for corporate law purposes we are organized as a limited partnership
under Marshall Islands law. Moreover, our general partner will be responsible
for managing our business and affairs and has been granted certain veto rights
over decisions of our board of directors, which may negatively affect our
ability to qualify for an exemption from tax under Section 883 of the Code.
Therefore, we can give no assurances that the IRS will not take a different
position regarding our qualification, or the qualification of any of our
subsidiaries, for this tax exemption.
If we or our subsidiaries are not
entitled to this exemption under Section 883 for any taxable year, we or our
subsidiaries generally would be subject for those years to a 4.0% U.S. federal
gross income tax on our U.S. source shipping income. The imposition of this
taxation could have a negative effect on our business and would result in
decreased earnings available for distribution to our unitholders. See
“Item 10E:
Taxation The Section 883 Exemption”.
You
may be subject to income tax in one or more non-U.S. countries, including
Greece, as a result of owning our units if, under the laws of any such country,
we are considered to be carrying on business there. Such laws may require you to
file a tax return with and pay taxes to those countries.
We intend that our affairs and the
business of each of our subsidiaries will be conducted and operated in a
manner that minimizes income taxes imposed upon us and these subsidiaries
or that may be imposed upon you as a result of owning our units. However,
because we are organized as a partnership, there is a risk in some jurisdictions
that our activities and the activities of our subsidiaries may be attributed to
our unitholders for tax purposes and, thus, that you will be subject to tax in
one or more non-U.S. countries, including Greece, as a result of owning our
units if, under the laws of any such country, we are considered to be carrying
on business there. If you are subject to tax in any such country, you may be
required to file a tax return with and to pay tax in that country based on your
allocable share of our income. We may be required to reduce distributions to you
on account of any withholding obligations imposed upon us by that country in
respect of such allocation to you. The United States may not allow a tax credit
for any foreign income taxes that you directly or indirectly incur.
We believe we can conduct our
activities in a manner so that our unitholders should not be considered to be
carrying on business in Greece solely as a consequence of the acquisition,
holding, disposition or redemption of our units. However, the question of
whether either we or any of our subsidiaries will be treated as carrying on
business in any country, including Greece, will largely be a question of fact
determined through an analysis of contractual arrangements, including the
management agreement and the administrative services agreement we will enter
into with Capital Ship Management, and the way we conduct business or
operations, all of which may change over time. The laws of Greece or any other
foreign country may also change, which could cause the country’s taxing
authorities to determine that we are carrying on business in such country and
are subject to its taxation laws. Any foreign taxes imposed on us or any
subsidiaries will reduce our cash available for distribution.
A.
History and Development of the Partnership
We are a master limited partnership
formed as Capital Product Partners L.P. under the laws of the Marshall Islands
on January 16, 2007. We maintain our principal executive headquarters at 3
Iassonos Street, Piraeus, 18537 Greece and our telephone number is +30 210 4584
950.
In March 2007 we entered into a 10-year
revolving credit facility of up to $370.0 million with HSH Nordbank AG
which is non-amortizing until June 2012 and can be used for acquisitions and for
general partnership purposes. To date, we have used $366.5 million of this
facility.
On April 3, 2007, we completed our IPO
of 13,512,500 common units at a price of $21.50 per unit. We did not receive any
proceeds from the sale of our common units. Capital Maritime used part of the
proceeds from our IPO to repay the debt on the eight vessels that made up our
fleet at the time of the IPO and concurrently transferred its interest in the
vessel-owning companies of these eight newly built, double hull medium range
(“MR”) product tanker under medium or long-term time or bareboat charter vessels
to us. Capital Maritime also paid the offering expenses, underwriting discounts,
selling commissions and brokerage fees incurred in connection with the IPO. At
the time of the IPO Capital Maritime also granted us a right of first offer
under an omnibus agreement for any MR tankers in its fleet under charter for two
or more years, giving us the opportunity to purchase additional vessels in the
future and we also entered into agreements with Capital Ship Management, a
subsidiary of Capital Maritime, to provide management and technical services in
connection with these and future vessels.
At the time of the IPO we also entered
into an agreement to acquire seven newbuildings from Capital Maritime at the
time of their delivery to Capital Maritime, for a total purchase price of $368.0
million, at the time of their delivery to Capital Maritime. We took delivery of
the first four vessels between May and September 2007 with the remaining three
vessels delivered between January and August 2008. All seven of these vessels
were under medium to long term charters with BP Shipping Limited, Morgan Stanley
Capital Group Inc. and subsidiaries of Overseas Shipholding Group Inc.
at the time of their delivery.
Between September 2007 and April 2008
we also acquired three additional, non-contracted, vessels from Capital
Maritime. In September 2007 we acquired the M/T Attikos, a 12,000 dwt, 2005
built double-hull product tanker chartered to Trafigura Beheer B.V. at the time,
at a purchase price of $23.0 million. In March and April 2008 we purchased
the M/T Amore Mio II, a 160,000 dwt, 2001 built tanker chartered to
BP Shipping Limited, and the M/T Aristofanis, 12,000 dwt, 2005 built product
tanker sister vessel to the M/T Attikos chartered to Shell International Trading
& Shipping Company Ltd, from Capital Maritime. The aggregate purchase price
for the M/T Amore Mio II was $95.0 million and for the M/T Aristofanis $23.0
million under the terms of the relevant share purchase agreement with Capital
Maritime. We funded a portion of the purchase price of the vessels through the issuance of 2,048,823 and 501,308 common units to Capital Maritime,
respectively, at a price of $18.42 and $20.08, respectively, per unit,
which was the price per unit as quoted on the Nasdaq Stock Exchange on the day
prior to the respective acquisition, and the
remainder through the incurrence of $57.5 million of debt under our new credit
facility and $2.0 million in cash. In conjunction with the equity issued
to Capital Maritime, Capital Maritime, made capital contributions to our general
partner, Capital GP L.L.C., of 40,976 and 10,026 common units, respectively, in
order for it to maintain its 2% general partner interest in us.
In March 2008, we entered into an
additional 10-year revolving credit facility of up to $350.0 million with HSH
Nordbank AG which is non-amortizing until March 2013 and can be used to finance
a portion of the purchase price of future acquisitions. To date, we have used
$107.5 million of
this facility, leaving capacity of $242.5 million.
On August 29, 2008, we filed a
registration statement on Form F-3 with the SEC using a “shelf” registration
process. Under this shelf registration process, we may sell, in one
or more offerings, up to $300.0 million in total aggregate offering price of the
common units, and Capital Maritime may sell up to 11,304,651 common units
(including the 8,805,522 common units issued upon conversion of the subordinated
units into common units on a one for one basis on February 14, 2009). To date,
no securities have been offered under the shelf registration
process.
On January 30, 2009, we announced the
payment of an exceptional non-recurring distribution of $1.05 per unit for the
fourth quarter of 2008, bringing annual distributions to unitholders to $2.27
per unit for the year ended December 31, 2008, a level which under the terms of
our partnership agreement resulted in the early termination of the subordination
period and the automatic conversion of the subordinated units into common units.
Our board of directors unanimously determined that taking into account the
totality of relationships between the parties involved, the payment of this
exceptional distribution was in our best interests taking into consideration the
general economic conditions, our business requirements, risks relating to our
business as well as alternative uses available for our cash. This exceptional
distribution was funded from operating surplus and through a decrease in
existing reserves. Payment of the exceptional distribution was made on February
13, 2009 to unitholders of record on February 10, 2009. Following such automatic
conversion, Capital Maritime owns a 46.6% interest in us, including 11,304,651
common units and a 2% interest through its ownership of our general partner
Capital GP L.L.C., and may significantly impact any vote under the terms of the
partnership agreement. The common units owned
by Capital Maritime have the same rights as our other outstanding common
units.
In April 2009, we extended our charter
coverage and renewed our fleet when we acquired all of Capital Maritime’s
interest in its wholly owned subsidiaries that own the M/T Ayrton II and the M/T
Agamemnon II, two of the vessels identified under the omnibus agreement, in
exchange for all of our interest in our wholly owned subsidiaries that own the
M/T Atrotos and the M/T Assos. Both acquired vessels were under time charters to
BP expiring in 2011 at the time of their delivery. As part of the transaction,
we paid an additional consideration of $4.0 million per vessel to Capital
Maritime and remained responsible for any costs associated with the delivery of
the vessels to Capital Maritime. Morgan Stanley Capital Group Inc., the
charterer of the M/T Assos and the M/T Atrotos, compensated us for the early
termination of the charters of these two vessels which were scheduled to expire
in October 2009 and April 2010, respectively.
In June 2009, we reached agreement with
HSH Nordbank AG, whereby we amended the terms of both our credit facilities
effective for a three year period from the end of June 2009 to the end of June
2012. Under the terms of the amendments the fleet loan-to-value covenant was
increased to 80% from 72.5%. It was also agreed to amend the manner in which
market valuations of vessels are conducted. The interest margin was also
increased to 1.35%-1.45% over LIBOR subject to the level of the asset
covenants. All other terms in our credit facilities remained
unchanged.
In January 2010, we rechartered two
tanker vessels, the M/T Axios and the M/T Agisilaos, with subsidiaries of
Capital Maritime. Each charter shall commence directly upon the vessel’s
redelivery from its current charter with BP Shipping Limited and is for a 12
month period (+/- 30 days). The performance of each charter is guaranteed by
Capital Maritime.
As of December 31, 2009, our fleet
consisted of 18 double-hull, high specification tankers including one of the
largest Ice Class 1A MR product tanker fleets in the world based on number of
vessels and carrying capacity. We currently have no capital commitments to
purchase or build additional vessels. We intend to continue to evaluate
potential acquisitions and to take advantage of our relationship with Capital
Maritime in a prudent manner that is accretive to our unitholders and to
long-term distribution growth.
On
January 29, 2010, we provided guidance for expected distributions to our
unitholders in 2010, announcing a target annual distribution level of $0.90 per
unit paid equally over four quarters. Please see “—Business Overview—Recent
Developments” below for more information.
Please see “—Our Fleet” below for more
information regarding our vessels, their charters, acquisition dates and prices
and other information, “Item 5B: Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Net Cash Used in Investing Activities
and Note 1 (Basis of Presentation and General Information) to our Financial
Statements included herein for more information regarding any acquisitions,
including a detailed explanation of how they were accounted for
and “Item 7B: Related-Party Transactions” for a description of the
terms of certain transactions.
B.
Business Overview
We are an international tanker company
and our 18 vessels trade on a worldwide basis and are capable of carrying crude
oil, refined oil products, such as gasoline, diesel, fuel oil and jet fuel, as
well as edible oils and certain chemicals such as ethanol. Our vessels comply
not only with the strict regulatory standards that are currently in place but
also with the stricter regulatory standards that are currently expected to be
implemented. We currently charter 17 of our 18 vessels under medium to long-term
time and bareboat charters (two to 10 years, with an average remaining term of
approximately 3.7 years as of December 31, 2009) to large charterers such as BP
Shipping Limited, Morgan Stanley Capital Group Inc., Shell International
Trading & Shipping Company Ltd. and subsidiaries of Overseas Shipholding
Group Inc. All our time and bareboat charters provide for the receipt of a
fixed base rate for the life of the charter, and in the case of 10 of our 11
time charters, also provide for profit sharing arrangements in excess of the
base rate. Please see “Profit Sharing Arrangements” below for a detailed
description of how profit sharing is calculated.
Business
Strategies
Our
primary business objective is to pay a sustainable quarterly distribution per
unit and to increase our distributions over time by executing the following
business strategies (please see “—Recent Developments” below for our current
guidance on target distributions for 2010):
|
|
●
|
Maintain
medium to long-term fixed charters. We believe that the
medium to long-term, fixed-rate nature of our charters, our profit sharing
arrangements, and our agreement with Capital Ship Management for the
commercial and technical management of our vessels provide a stable base
of revenue and predictable expenses that will result in stable cash flows
in the medium to long-term. As our vessels come up for rechartering we
will seek to redeploy them under contracts that reflect our expectations
of the market conditions prevailing at the time. We believe that
the age of our fleet, which is one of the youngest in the industry,
the high specifications of our vessels and our manager’s ability to meet
the rigorous vetting requirements of some of the world’s most selective
major international oil companies position us well to recharter our
vessels.
|
|
|
●
|
Expand our
fleet through accretive acquisitions. We intend to
continue to evaluate potential acquisitions of additional vessels and to
take advantage of our unique relationship with Capital Maritime to make
strategic acquisitions in the medium to long term in a prudent manner that
is accretive to our unitholders and to long-term distribution
growth. We will continue to evaluate opportunities to acquire both
newbuildings and second-hand vessels, if and when they are chartered for
more than two years, from Capital Maritime and from third parties as we
seek to grow our fleet in a way which is accretive to our distributions.
In addition, we believe our access to the credit and capital markets and
our financial flexibility enhance our ability to realize new vessel
acquisitions from Capital Maritime or third parties that are accretive to
our unitholders.
|
|
|
●
|
Capitalize
on our relationship with Capital Maritime and expand our charters with
recognized charterers. We believe that we can leverage
our relationship with Capital Maritime and its ability to meet the
rigorous vetting processes of leading oil companies in order to attract
new customers. We also plan to increase the number of vessels we charter
to our existing charterers as well as enter into charter agreements with
new customers in order to maintain a portfolio of charters that is diverse
from a customer, geography and maturity
perspective.
|
|
|
●
|
Maintain
and build on our ability to meet rigorous industry and regulatory safety
standards. Capital Ship Management, an affiliate of our general
partner that manages our vessels, has an excellent vessel safety record,
is capable of fully complying with rigorous health, safety and
environmental protection standards, and is committed to providing our
customers with a high level of customer service and support. We believe
that in order for us to be successful in growing our business in the
future, we will need to maintain our excellent vessel safety record and
maintain and build on our high level of customer service and
support.
|
Competitive
Strengths
We believe that we are well-positioned
to execute our business strategies and our future prospects for success are
enhanced because of the following competitive strengths:
|
|
●
|
Strong
relationship with Capital Maritime. We believe our
relationship with Capital Maritime and its affiliates provides numerous
benefits that are key to our long-term growth and success, including
Capital Maritime’s reputation within the shipping industry and its network
of strong relationships with many of the world’s leading oil companies,
commodity traders and shipping companies. We also benefit from Capital
Maritime’s expertise in technical fleet management and its ability to meet
the rigorous vetting requirements of some of the world’s most selective
major international oil companies, including BP p.l.c., Chevron
Corporation, Conoco-Phillips Inc., ExxonMobil Corporation, Royal Dutch
Shell plc, StatoilHydro ASA, and Total
S.A.
|
|
|
●
|
Leading
position in the product tanker market, with a modern, capable fleet, built
to high specifications. Our fleet of 18 tankers
includes one of the largest Ice Class 1A MR fleets in the world based
on number of vessels and carrying capacity. The IMO II/III and Ice Class
1A classification notations of most of our vessels provide a high degree
of flexibility as to what cargoes our charterers can choose to trade as
they employ our fleet. We also believe that the range in size and the
geographic flexibility of our fleet are attractive to our charterers,
allowing them to consider a variety of trade routes and cargoes. With an
average age of approximately 3.5 years as of December 31, 2009, our fleet
is one of the youngest fleets of its size in the
world. Finally, we believe our vessels’ compliance with
existing and expected regulatory standards, the high technical
specifications of our vessels and our fleet’s flexibility to transport a
wide variety of refined products and crude oil across a wide range of
trade routes is attractive to our existing and potential
charterers.
|
|
|
●
|
Financial
strength and flexibility. Subject to compliance
with the relevant covenants we currently have $246.0 million in undrawn
amounts available under our 10-year non-amortizing credit facilities
entered into at the time of our IPO and in March 2008. We may use these
amounts to finance up to 50% of the purchase price of any potential future
purchases of modern tanker vessels from Capital Maritime or any third
parties. We believe
that the terms of our amended credit facilities enhance our
financial flexibility to realize new vessel acquisitions from Capital
Maritime and third parties.
|
|
|
Recent
Developments
|
On
January 29, 2010, we announced that based on the challenging economic
environment and specifically the much lower charter rates in the market, we
believe we should reduce our targeted future annual distribution level to below
our previous distributions. In particular, our management noted the direct
impact that the low charter rate environment will have on the partnership as
eight of our vessels are coming off charter in 2010 and an additional three
vessels in 2011. As a result, the board of directors agreed with management’s
guidance that a target annual distribution level of $0.90 per unit paid equally
over four quarters is more prudent for the partnership under current conditions.
We believe that this distribution is sustainable over the medium to longer term
even if the charter rate environment remains at its current depressed levels.
The new annual distribution level will provide us with a number of advantages,
in particular provide us with greater financial flexibility and liquidity,
assist us in pursuing our long-term business strategy of accretive acquisitions
and increase our ability to take advantage of growth opportunities. The tanker
shipping market is cyclical and we would be looking at factors, such as improved
oil product demand, the expected implementation of the single-hull tanker phase
out, the availability of shipping finance and further delays and cancellations
that are likely to reduce the number of new tanker vessel deliveries, in order
to assess a potential market recovery in 2010/2011. We will monitor these
factors closely and if they improve we will consider revisiting our distribution
guidance.
Our
Customers
We provide marine transportation
services under medium-to long-term time charters or bareboat charters with
counterparties that we believe are creditworthy. Currently, our customers
include:
|
|
●
|
BP Shipping
Limited, the shipping affiliate of BP p.l.c., one of the world’s
largest producers of crude oil and natural gas. BP p.l.c. has exploration
and production interests in over 20 countries. BP Shipping provides all
logistics for the marketing of BP’s oil and gas
cargoes.
|
|
|
●
|
Morgan
Stanley Capital Group Inc., the commodities division of Morgan
Stanley, the international investment bank, is a leading commodities
trading firm in the energy and metals markets, encompassing both physical
and derivative capabilities.
|
|
|
●
|
Overseas
Shipholding Group Inc., one of the largest independent
shipping companies in the world operating crude and product tankers. As of
October 31, 2009 Overseas
Shipholding Group Inc.’s operating fleet consisted of 129 vessels, 26
of which were under construction, aggregating 13.1 million
dwt.
|
|
|
●
|
Shell
International Trading & Shipping Company Ltd., a subsidiary of Royal Dutch Shell
plc., is the
principal trading and shipping business of the Royal Dutch/Shell Group.
It trades millions
of barrels crude oil and oil products and moves cargoes on
some 100 deep-sea tankers and gas
carriers around the world on a daily
basis.
|
|
|
●
|
Capital
Maritime & Trading Corp., an established shipping company
with activities in the sea transportation of wet (crude oil,
oil products, chemicals) and dry cargos worldwide with a long
history of operating and investing in the shipping
markets.
|
For the
year ended December 31, 2009, BP Shipping Limited, Morgan Stanley Capital Group
Inc. and subsidiaries of Overseas Shipholding Group Inc accounted for 59%,
22% and 12% of our revenues, respectively. For the year ended December 31, 2008
BP Shipping Limited and Morgan Stanley Capital Group Inc., accounted for 54% and
33% of our revenues, respectively, and for the year ended December 31, 2007 they
accounted for 58% and 24% of our revenues, respectively. The loss of
any significant customer or a substantial decline in the amount of services
requested by a significant customer could harm our business, financial condition
and results of operations.
Our
Fleet
At the time of our IPO on April 3,
2007, our fleet consisted of eight vessels. Since that date, the size of our
fleet has increased in terms of both number of vessels and carrying capacity and
currently consists of 18 vessels of various sizes with an average age of
approximately 3.5 years and average remaining term under our charters of
approximately 3.7 years (as of December 31, 2009).
The following table summarizes certain
key information with respect to the vessels we have purchased from Capital
Maritime since our IPO:
|
Name of Vessel
|
Contracted Purchase at IPO
|
Acquisition/Delivery Date
|
Purchase Price
|
|||||
|
Atrotos
|
Yes
|
May
2007
|
$ | 56,000,000 | ||||
|
Akeraios
|
Yes
|
July
2007
|
$ | 56,000,000 | ||||
|
Anemos
I
|
Yes
|
September
2007
|
$ | 56,000,000 | ||||
|
Apostolos
|
Yes
|
September
2007
|
$ | 56,000,000 | ||||
|
Attikos
|
No
|
September
2007
|
$ | 23,000,000 | ||||
|
Alexandros
II
|
Yes
|
January
2008
|
$ | 48,000,000 | ||||
|
Amore
Mio II (1)
|
No
|
March
2008
|
$ | 85,739,320 | ||||
|
Aristofanis
(1)
|
No
|
April2008
|
$ | 21,566,265 | ||||
|
Aristotelis
II
|
Yes
|
June
2008
|
$ | 48,000,000 | ||||
|
Aris
II
|
Yes
|
August
2008
|
$ | 48,000,000 | ||||
|
Agamemnon
II (2)
|
No
|
April
2009
|
$ | 39,774,578 | ||||
|
Ayrton
II (2)
|
No
|
April
2009
|
$ | 38,721,322 | ||||
___________
(1) The M/T
Amore Mio II was acquired on March 27, 2008 and the M/T Aristofanis was acquired
on April 30, 2008. Please see “Item 4: A. History and Development of the
Partnership” above and Note 1 (Basis of Presentation and General Information) to
our Financial Statements included herein for more information regarding these
acquisitions, including details of the funding of such
acquisitions
(2) The
M/T Agamemnon II and the M/T Ayrton II, two of the six vessels that Capital
Maritime had granted us an offer to purchase under the terms of the omnibus
agreement, were acquired in exchange for the M/T Assos (which was part of our
fleet at the time of the IPO) and the M/T Atrotos (which was acquired from
Capital Maritime in May 2007) on April 7 and April 13, 2009, respectively.
Please see Note 1 (Basis of Presentation and General Information) to our
Financial Statements included herein for more information regarding these
acquisitions.
We intend to continue to take advantage
of our unique relationship with Capital Maritime and, subject to prevailing
shipping, charter and financial market conditions and the approval of our board
of directors, make strategic acquisitions in the medium to long term in a
prudent manner that is accretive to our unitholders and to long-term
distribution growth. Pursuant to the omnibus agreement we entered into with
Capital Maritime at the time of our IPO, Capital Maritime has granted us a right
of first offer for any MR tankers in its fleet under charter for two or more
years. Two of the vessels identified under the omnibus agreement were acquired
by us in April 2009. Capital Maritime is, however, under no obligation to fix
any of these vessels under charters of two or more years. Please read “Item 7B:
Related-Party Transactions” for a detailed description of our omnibus agreement
with Capital Maritime.
The table below provides summary
information as of December 31, 2009 about the vessels in our fleet and the
vessels we have acquired or may have the opportunity to acquire from Capital
Maritime, as well as their delivery date or expected delivery date to us and
their employment,
including earliest possible redelivery dates of the vessels and the relevant
charter rates. The table also includes the daily management fee and approximate
expected termination date of the management agreement with Capital Ship
Management with respect to each vessel. Sister vessels, which are vessels of
similar specifications and size typically built at the same shipyard, are
denoted by the same letter in the table. We believe that sister vessels provide
a number of efficiency advantages in the management of our fleet.
All of
the vessels in our fleet are or were designed, constructed, inspected and tested
in accordance with the rules and regulations of Det Norske Veritas (“DNV”),
Lloyd’s Register of Shipping (“Lloyd’s”) or the American Bureau of
Shipping (“ABS”) and were under time or bareboat charters from the time of
their delivery.
OUR
FLEET
|
Vessel Name
|
Sister
Vessels (1)
|
Year Built
|
DWT
|
OPEX
(per day)
|
Management
Agreement Expiration
|
Duration/
Charter
Type (2)
|
Expiry
of
Charter (3)
|
Daily
Charter
Rate (Net) (4)
|
Profit
Share
|
Charterer
(5)
|
Description
|
||||||||||||||||||||||
|
VESSELS CURRENTLY IN OUR
FLEET
|
|||||||||||||||||||||||||||||||||
|
Atlantas
(6)
|
A | 2006 | 36,760 | $ | 250 |
Jan-Apr
2011
|
8-year
BC
|
Mar-2014
|
$ | 15,000 | (7) |
BP
|
Ice
Class 1A IMO II/III Chemical/ Product
|
||||||||||||||||||||
|
Aktoras
(6)
|
A | 2006 | 36,759 | $ | 250 |
Apr-Jul
2011
|
8-year
BC
|
Jun-2014
|
$ | 15,000 | (7) |
BP
|
|||||||||||||||||||||
|
Aiolos
(6)
|
A | 2007 | 36,725 | $ | 250 |
Nov
‘11-Feb ‘12
|
8-year
BC
|
Feb-2015
|
$ | 15,000 | (7) |
BP
|
|||||||||||||||||||||
|
Agisilaos
|
A | 2006 | 36,760 | $ | 5,500 |
May-Aug
2011
|
3.6-year
TC
|
Mar-2010
|
$ | 19,750 | (8)(9) |
ü
|
BP
|
||||||||||||||||||||
|
Arionas
|
A | 2006 | 36,725 | $ | 5,500 |
Aug-Nov
2011
|
3.6-year
TC
|
Jun-2010
|
$ | 19,750 | (8) |
ü
|
BP
|
||||||||||||||||||||
|
Axios
|
B | 2007 | 47,872 | $ | 5,500 |
Dec
11-Mar 12
|
3-year
TC
|
Jan-2010
|
$ | 20,500 | (8)(10) |
ü
|
BP
|
||||||||||||||||||||
|
Avax
|
B | 2007 | 47,834 | $ | 5,500 |
Dec
11-Mar 12
|
3-year
TC
|
May-2010
|
$ | 20,500 |
ü
|
BP
|
|||||||||||||||||||||
|
Akeraios
|
B | 2007 | 47,781 | $ | 5,500 |
May-Aug
2012
|
3-year
TC
|
Jun-2010
|
$ | 20,000 |
ü
|
MS
|
|||||||||||||||||||||
|
Anemos
I
|
B | 2007 | 47,782 | $ | 5,500 |
Jul-Oct
2012
|
3-year
TC
|
Aug-2010
|
$ | 20,000 |
ü
|
MS
|
|||||||||||||||||||||
|
Apostolos
|
B | 2007 | 47,782 | $ | 5,500 |
Jul-Oct
2012
|
3-year
TC
|
Aug-2010
|
$ | 20,000 |
ü
|
MS
|
|||||||||||||||||||||
|
Attikos
(11)
|
C | 2005 | 12,000 | $ | 5,500 |
Sept-Nov
2012
|
Spot
|
Spot
|
- | - |
Chem./Prod.
|
||||||||||||||||||||||
|
Alexandros
II (12)(13)
|
D | 2008 | 51,258 | $ | 250 |
Dec
12-Mar 13
|
10-year
BC
|
Dec-2017
|
$ | 13,000 |
OSG
|
IMO
II/III Chem./Prod.
|
|||||||||||||||||||||
|
Amore
Mio II
|
E | 2001 | 159,982 | $ | 8,500 |
Mar-Apr
2013
|
3-year
TC
|
Jan-2011
|
$ | 36,000 | (8) |
ü
|
BP
|
Crude
Oil
|
|||||||||||||||||||
|
Aristofanis
|
C | 2005 | 12,000 | $ | 5,500 |
Mar-Apr
2013
|
2-year
TC
|
Mar-2010
|
$ | 12,952 |
Shell
|
Product
|
|||||||||||||||||||||
|
Aristotelis
II (12)(13)
|
D | 2008 | 51,226 | $ | 250 |
Mar-Jun
2013
|
10-year
BC
|
May-2018
|
$ | 13,000 |
OSG
|
IMO
II/III
Chem./Prod.
|
|||||||||||||||||||||
|
Aris
II (12)(13)
|
D | 2008 | 51,218 | $ | 250 |
May-Aug
2013
|
10-year
BC
|
Jul-2018
|
$ | 13,000 |
OSG
|
||||||||||||||||||||||
|
Agamemnon
II (14)
|
D | 2008 | 51,238 | $ | 6,500 |
Oct
2013
|
3-year
TC
|
Dec-2011
|
$ | 22,000 |
ü(15)
|
BP
|
|||||||||||||||||||||
|
Ayrton
II (14)
|
D | 2009 | 51,260 | $ | 6,500 |
Mar
2014
|
2-year
TC
|
Mar-2011
|
$ | 22,000 |
ü(15)
|
BP
|
|||||||||||||||||||||
|
Total
Fleet DWT:
|
862,962 | ||||||||||||||||||||||||||||||||
|
VESSELS WE MAY PURCHASE FROM CAPITAL MARITIME IF
UNDER LONG TERM CHARTER (16)
|
|||||||||||||||||||||||||||||||||
|
Aristidis
|
A | 2006 | 36,680 |
Ice
Class 1A IMO II/III Chemical/ Product
|
|||||||||||||||||||||||||||||
|
Alkiviadis
|
A | 2006 | 36,721 | ||||||||||||||||||||||||||||||
|
Assos
|
B | 2006 | 47,872 | ||||||||||||||||||||||||||||||
|
Atrotos
|
B | 2007 | 47,786 | ||||||||||||||||||||||||||||||
|
Total
DWT:
|
169,059 | ||||||||||||||||||||||||||||||||
__________
|
(1)
|
Sister
vessels are denoted in the tables by the same letter as follows: (A)
and (B): these vessels were built by Hyundai MIPO Dockyard Co., Ltd.,
South Korea, (C): these vessels were built by Baima Shipyard, China, (D):
these vessels were built by STX Shipbuilding Co., Ltd., South Korea, (E):
this vessel was built by Daewoo Shipbuilding and Marine Engineering
Co., Ltd., South Korea.
|
|
(2)
|
TC:
Time Charter, BC: Bareboat Charter.
|
|
(3)
|
Earliest
possible redelivery date. The redelivery date for the M/T Aristofanis is
the date of expiration. The redelivery period for the M/T Agisilaos is
between March 1 and March 29, 2010 and for the M/T Arionas it is between
June 3 and June 30, 2010. For all other charters, the redelivery date is
+/–30 days at the charterer’s
option.
|
|
(4)
|
All
rates quoted above are the net rates after we or our charterers have paid
any relevant commissions on the base rate. The BP time and bareboat
charters are subject to 1.25% commissions. The Shell time charter is
subject to 2.25% commissions. We do not pay any commissions in connection
with the MS time charters.
|
|
(5)
|
BP:
BP Shipping Limited. MS: Morgan Stanley Capital Group Inc. OSG:
certain subsidiaries of Overseas Shipholding Group Inc. Shell: Shell
International Trading & Shipping Company
Ltd.
|
|
(6)
|
For
the duration of the BC these vessels have been renamed British Ensign,
British Envoy and British Emissary,
respectively.
|
|
(7)
|
The
last three years of the BC will be at a daily charter rate of $13,433
(net).
|
|
(8)
|
In
addition to a commission on the gross charter rate, the ship broker is
entitled to an additional 1.25% commission on the profit
share.
|
|
(9)
|
Agreement
reached for the vessel to be rechartered with a subsidiary of Capital
Maritime at a net daily charter rate of $11,850 ($12,000 gross) and
includes 50/50 profit share for voyages outside the Institute Warranty
Limits (IWL). The charter commences directly upon the vessel’s redelivery
from its current charter, expected in March 2010 and is for a period of 12
months (+/- 30 days). The performance of the charter is guaranteed by
Capital Maritime.
|
|
(10)
|
Agreement
reached for the vessel to be rechartered with a subsidiary of Capital
Maritime at a net daily charter rate of $12, 591 ($12,750 gross) and
includes 50/50 profit share for voyages outside the IWL. The charter
commences directly upon the vessel’s redelivery from its current charter,
expected in February 2010, for a period of 12 months (+/- 30 days). The
performance of the charter is guaranteed by Capital
Maritime.
|
|
(11)
|
The
M/T Attikos concluded its 2.3 year time charter with Trafigura Beheer B.V.
in October 2009. The vessel is currently trading on the spot
market.
|
|
(12)
|
For
the duration of the BC these vessels have been renamed: Overseas Serifos,
Overseas Sifnos and Overseas
Kimolos.
|
|
(13)
|
OSG
has an option to purchase each vessel at the end of the eighth, ninth or
tenth year of its charter for $38.0 million, $35.5 million and
$33.0 million, respectively, which option is exercisable six months
before the date of completion of the relevant year of the charter. The
expiration date above may therefore change depending on whether the
charterer exercises its purchase
option.
|
|
(14)
|
The
M/T Agamemnon II and the M/T Ayrton II, two of the six vessels for which
Capital Maritime had granted us an offer to purchase under the terms of
the omnibus agreement, were acquired in exchange for the M/T Assos (which
was part of our fleet at the time of the IPO) and the M/T Atrotos (which
was acquired from Capital Maritime in May 2007) on April 7 and April 13,
2009, respectively.
|
|
(15)
|
Profit
share element for these vessels applies only to voyages outside the
IWL.
|
|
(16)
|
Pursuant
to our omnibus agreement with Capital Maritime, Capital Maritime has
granted us a right of first offer for any MR tankers in its fleet under
charter for two or more years. We are under no obligation to exercise such
right.
|
Our
Charters
Seventeen of the 18 vessels in our
fleet are under medium to long-term time or bareboat charters with an average
remaining term under our charters of approximately 3.7 years as of December 31,
2009. One of our vessels currently trades on the spot market and, under certain
circumstances, we may operate additional vessels in the spot market until they
have been fixed under appropriate medium to long-term charters. As our vessels
come up for rechartering we will seek to redeploy them under contracts that
reflect our expectations of the market conditions prevailing at the time. Please
see “—Our Fleet” above, including the chart and accompanying notes, for more
information on our time and bareboat charters, including counterparties,
expected expiration dates of the charters and daily charter rates.
Time
Charters
A time charter is a contract for the
use of a vessel for a fixed period of time at a specified daily rate. Under a
time charter, the vessel’s owner provides crewing and other services related to
the vessel’s operation, the cost of which is included in the daily rate and the
charterer is responsible for substantially all vessel voyage costs except for
commissions which are assumed by the owner. In the case of the vessels under
time charter to Morgan Stanley Capital Group Inc., the charterer is also
responsible for the payment of all commissions. The basic hire rate payable
under the charters is a previously agreed daily rate, as specified in the
charter, payable at the beginning of the month in U.S. Dollars. We currently
have 11 vessels under time charter agreements of which 10 contain profit-sharing
provisions that allow us to realize at a pre-determined percentage additional
revenues when spot rates are higher than the base rates incorporated in our
charters or, in some instances, through greater utilization of our vessels by
our charterers.
Profit Sharing
Arrangements
Morgan Stanley Profit
Sharing. Pursuant to an agreement reached with Morgan Stanley
Capital Group Inc. on July 28, 2008, which took effect
retroactively as of June 1, 2008, the profit sharing arrangements for each
vessel time chartered with Morgan Stanley Capital Group Inc. are calculated
according to the two-step process set out below. Initially, a weighted average
of two indices published daily by the Baltic Exchange based on specific routes
and cargo sizes representative of the vessel’s trading is calculated and settled
quarterly. Specifically, the calculation is based on the performance of the
transatlantic route (TC2) and the Caribbean-US route (TC3) at certain
predetermined weights. If the weighted average time charter equivalent (“TCE”)
is less than or equal to the basic hire rate, then we receive the basic hire
rate only. If the weighted average TCE exceeds the basic hire rate, then we
receive the basic hire rate plus 50% of the excess. In addition, we have the
right to access the charterer’s annual results of operations for each vessel,
and, if these show that the vessel has earned more than the calculation above,
we receive 50% of the vessel’s actual profits less any amounts already received
pursuant to the calculation above. If the annual results of
operations for each vessel do not exceed the estimated profit calculation based
on the two routes then no additional payments are made. No commissions are
payable on revenues derived from our profit shares. Annual results of operations
from the charterer are to be presented by December 31 of each year for the
period commencing December 1 of the previous year to November 30 of the year in
question, with the exception of the fiscal year from December 1, 2007 to
November 30, 2008 for which results of operations were settled semi-annually, in
May and November 2008.
BP Profit Sharing. The profit
sharing arrangements for four of the seven vessels time chartered with BP
Shipping Limited are based on the calculation of the TCE according to the “last
to next” principle. This means that actual voyage revenues earned and received,
actual expenses incurred and actual time taken to perform the voyage are used
for the purpose of the calculation. The charterer is obliged to provide us with
a copy of each fixture note and all reasonable documentation with respect to
items of cost and earnings referring to each voyage within every calculation
period, as well as with a statement listing actual voyage results for voyages
completed and estimated results for any voyage not completed at the time of
settlement. When actual revenue and/or expenses have not been settled,
BP Shipping Limited’s estimates apply but remain subject to adjustment upon
closing of actual accounts. If the average daily TCE is less than or equal to
the basic gross hire rate, then we receive the basic net hire rate only. If the
average daily TCE exceeds the basic gross hire rate, then we receive the basic
net hire rate plus 50% of the excess over the gross hire rate. The profit share
with BP Shipping Limited is calculated and settled quarterly.
In the case of the M/T Amore Mio II,
the profit share is calculated and settled monthly and is based on the weighted
monthly average of two indices published daily by the Baltic Exchange based on
specific routes and cargo sizes representative of the vessel’s
trading.
In the case of the M/T Agamemnon II and
the M/T Ayrton II, profit share is calculated and settled following the
completion of each voyage according to the “last to next” principle and is only
applicable to voyages during which Institute Warranty Limits have been breached.
In such event, we receive the basic net hire rate plus 50% of the excess over
the gross hire rate.
In addition to the 1.25% commission we
pay on the gross charter rate for each vessel, the relevant ship broker is also
entitled to an additional 1.25% commission on the amount of profit share
received from the M/T Agisilaos, the M/T Arionas, the M/T Axios and the M/T
Amore Mio II.
TCE rate is a shipping industry
performance measure used primarily to compare daily earnings generated by
vessels on time charters with daily earnings generated by vessels on voyage
charters, because charter hire rates for vessels on voyage charters are
generally not expressed in per day amounts while charter hire rates for vessels
on time charters generally are expressed in such amounts. TCE is expressed as
per ship per day rate and is calculated as voyage and time charter revenues less
voyage expenses during a period divided by the number of operating days during
the period, which is consistent with industry standards.
Bareboat
Charters
A bareboat charter is a contract
pursuant to which the vessel owner provides the vessel to the customer for a
fixed period of time at a specified daily rate, and the customer provides for
all of the vessel’s expenses (including any commissions) and generally assumes
all risk of operation. In the case of the vessels under bareboat charter to BP
Shipping Limited, we are responsible for the payment of any commissions. The
customer undertakes to maintain the vessel in a good state of repair and
efficient operating condition and drydock the vessel during this period at its
cost and as per the classification society requirements. The basic rate hire is
payable to us monthly in advance in U.S. Dollars. We currently have six vessels
under bareboat charter, three with BP Shipping Limited and three with
subsidiaries of Overseas Shipholding Group Inc. The charters entered into with
subsidiaries of Overseas Shipholding Group Inc. are fully and
unconditionally guaranteed by Overseas Shipholding Group Inc. and include
options for the charterer to purchase each vessel for $38.0 million,
$35.5 million or $33.0 million at the end of the eighth, ninth or
tenth year of the charter, respectively. In each case, the option to purchase
the vessel must be exercised six months prior to the end of the charter
year.
Spot
Charters
A spot charter generally refers to a
voyage charter or a trip charteror a short term time charter. We currently have
one vessel trading in the spot market.
Voyage
/ Trip Charter
A voyage charter involves the carriage
of a specific amount and type of cargo on a load port-to-discharge port basis,
subject to various cargo handling terms. Under a typical voyage charter, the
shipowner is paid on the basis of moving cargo from a loading port to a
discharge port. In voyage charters the shipowner generally is responsible for
paying both vessel operating costs and voyage expenses, and the charterer
generally is responsible for any delay at the loading or discharging ports.
Under a typical trip charter or short term time charter, the shipowner is paid
on the basis of moving cargo from a loading port to a discharge port at a set
daily rate. The charterer is responsible for paying for bunkers and other voyage
expenses, while the shipowner is responsible for paying vessel operating
expenses.
Seasonality
Our vessels operate under medium to
long-term charters and are not generally subject to the effect of seasonable
variations in demand.
Management
of Ship Operations, Administration and Safety
Capital Maritime, through its
subsidiary Capital Ship Management, provides expertise in various functions
critical to our operations. This enables a safe, efficient and cost-effective
operation and, pursuant to a management agreement and an administrative services
agreement we have entered into with Capital Ship Management, grants
us access to human resources, financial and other administrative
services, including bookkeeping, audit and accounting services, administrative
and clerical services, banking and financial services, client, investor
relations, information technology and technical management services, including
commercial management of the vessels, vessel maintenance and crewing (not
required for vessels subject to bareboat charters), purchasing, insurance and
shipyard supervision.
Under our time charter arrangements,
Capital Ship Management, our manager, is generally responsible for commercial,
technical, health and safety and other management services related to the
vessels’ operation, and the charterer is responsible for port expenses, canal
dues and bunkers and, in the case of the Morgan Stanley Capital Group Inc.
time charters, for commissions. Pursuant to our management agreement,
we pay a fixed daily fee per vessel for our time chartered vessels, for an
initial term of approximately five years from when we take delivery of each
vessel which covers vessel operating expenses, which include crewing, repairs
and maintenance, insurance and the expenses of the next scheduled special or
intermediate survey for each vessel, as applicable, and related drydocking.
Please see the table in “—Our Fleet” above for a list of the daily fee payable
and approximate expected termination dates of the management agreement with
Capital Ship Management with respect to each vessel currently in our fleet.
Capital Ship Management is directly responsible for providing all of these items
and services. Capital Ship Management is also entitled to supplementary
remuneration for additional fees and costs (as defined in our management
agreement) of any direct and indirect expenses it reasonably incurs in providing
these services which may vary from time to time, and which includes, amongst
others, certain costs associated with the vetting of our vessels, repairs
related to unforeseen extraordinary events and insurance deductibles. For the
year ended December 31, 2009, such additional fees amounted to approximately
$3.0 million, compared to $1.0 million for the year ended December 31, 2008.
Such costs may further increase to reflect unforeseen events and the continuing
inflationary vessel costs environment. The sole expense we incur in connection
with our vessels under bareboat charter is a daily fee of $250 per bareboat
chartered vessel payable to Capital Ship Management, mainly to cover compliance
costs. Capital Ship Management may provide these services to us directly or it
may subcontract for certain of these services with other entities, including
other Capital Maritime subsidiaries. Going forward, when we acquire new vessels
or when the respective management agreements for our vessels expire, we will
have to enter into new agreements which may provide for different fees or
include different terms. For more information on the management agreement and
administrative services agreements we have entered into with Capital Ship
Management please read “Item 7B: Related-Party Transactions—Management
Agreement” and “—Administrative Services Agreement.”
Capital Ship Management operates under
a safety management system in compliance with the IMO’s ISM code and certified
by the American Bureau of Shipping. Capital Ship Management’s management systems
also comply with the quality assurance standard ISO 9001, the environmental
management standard ISO 14001 and the Occupational Health & Safety
Management System (“OHSAS”) 18001, all of which are certified by Lloyd’s
Register of Shipping. Capital Ship Management recently implemented an
“Integrated Management System Certification” approved by the Lloyd’s Register
Group and also adopted “Business Continuity Management” principles in
cooperation with Lloyd’s Register Group. Two of the vessels managed by Capital
Ship Management Corp. topped BP’s ranking of top performing vessels in its time
chartered fleet of over 100 vessels for 2008. Capital Ship Management was also
selected as “Tanker Company of the Year 2009” at the annual Lloyd’s List Greek
Shipping Awards which took place in December 2009.
As a result, our vessels’ operations
are conducted in a manner intended to protect the safety and health of Capital
Ship Management’s employees, as applicable, the general public and the
environment. Capital Ship Management’s technical management team actively
manages the risks inherent in our business and is committed to eliminating
incidents that threaten safety, such as groundings, fires, collisions and
petroleum spills, as well as reducing emissions and waste
generation.
Major
Oil Company Vetting Process
Shipping in general, and crude oil,
refined product and chemical tankers, in particular, have been, and will remain,
heavily regulated. Many international and national rules, regulations and other
requirements – whether imposed by the classification societies, international
statutes (IMO, SOLAS (defined below), MARPOL, etc.), national and local
administrations or industry – must be complied with in order to enable a
shipping company to operate and a vessel to trade.
Traditionally there have been
relatively few large companies in the oil trading business and the industry
is continuously consolidating. The so called “oil majors companies”, such as BP
p.l.c., Chevron Corporation, Conoco-Phillips Inc., ExxonMobil Corporation, Royal
Dutch Shell plc, StatoilHydro ASA, and Total S.A., together with a few smaller
companies, represent a significant percentage of the production, trading and,
especially, shipping logistics (terminals) of crude and refined products
world-wide. Concerns for the environment, health and safety have led the oil
majors to develop and implement a strict due diligence process when selecting
their commercial partners. This vetting process has evolved into a sophisticated
and comprehensive risk assessment of both the vessel operator and the
vessel.
While a plethora of parameters are
considered and evaluated prior to a commercial decision, the oil majors, through
their association, the Oil Companies International Marine Forum (“OCIMF”), have
developed and are implementing two basic tools: (i) a Ship Inspection Report
Programme (“SIRE”) and (ii) the Tanker Management & Self Assessment (“TMSA”)
Program. The former is a physical ship inspection based upon a thorough Vessel
Inspection Questionnaire (“VIQ”), and performed by accredited OCIMF inspectors,
resulting in a report being logged on SIRE, while the latter is a recent
addition to the risk assessment tools used by the oil majors.
Based upon commercial needs, there are
three levels of risk assessment used by the oil majors: (i) terminal use, which
will clear a vessel to call at one of the oil major’s terminals; (ii) voyage
charter, which will clear the vessel for a single voyage; and (iii) term
charter, which will clear the vessel for use for an extended period of time. The
depth, complexity and difficulty of each of these levels of assessment vary.
While for the terminal use and voyage charter relationships a ship inspection
and the operator’s TMSA will be sufficient for the assessment to be undertaken,
a term charter relationship also requires a thorough office assessment. In
addition to the commercial interest on the part of the oil major, an excellent
safety and environmental protection record is necessary to ensure an office
assessment is undertaken.
We believe Capital Maritime and Capital
Ship Management are among a small number of ship management companies to have
undergone and successfully completed audits by six major international oil
companies in the last few years (i.e., BP p.l.c., Chevron Corporation,
ExxonMobil Corporation Royal Dutch Shell plc, StatoilHydro ASA, and Total
S.A.).
Crewing
and Staff
Capital Ship Management, an affiliate
of Capital Maritime, through a subsidiary in Romania and crewing agents in
Romania, Russia and the Philippines recruits senior officers for our
vessels. Capital Ship Management also maintains a presence in the Philippines
and Russia and has entered into an agreement for the training of officers under
ice conditions at a specialized training center in St. Petersburg. Capital
Maritime’s vessels are currently manned primarily by Romanian, Russian and
Filipino crew members. Having employed these crew configurations for Capital
Maritime for a number of years, Capital Ship Management has considerable
experience in operating vessels in this configuration and has a pool of
certified and experienced crew members which we can access to recruit crew
members for our vessels.
Classification,
Inspection and Maintenance
Every oceangoing vessel must be
“classed” and certified by a classification society. The classification society
is responsible for verifying that the vessel has been built and maintained in
accordance with the rules and regulations of the classification society and
ship’s country of registry as well as the international conventions of which
that country has accepted and signed. In addition, where surveys are required by
international conventions and corresponding laws and ordinances of a flag state,
the classification society will undertake them on application or by official
order, acting on behalf of the authorities concerned.
The classification society also
undertakes on request other surveys and checks that are required by regulations
and requirements of the flag state or port authority. These surveys are subject
to agreements made in each individual case and/or to the regulations of the
country concerned.
For the maintenance of the class
certificate, regular and extraordinary surveys of hull and machinery, including
the electrical plant, and any special equipment classed are required to be
performed as follows:
Annual Surveys, which are
conducted for the hull and the machinery at intervals of 12 months from the date
of commencement of the class period indicated on the certificate.
Intermediate Surveys, which
are extended annual surveys and are typically conducted two and one-half years
after commissioning and after each class renewal survey. In the case of
newbuildings, the requirements of the intermediate survey can be met through an
underwater inspection in lieu of drydocking the vessel. Intermediate surveys may
be carried out on the occasion of the second or third annual
survey.
Class Renewal Surveys (also
known as special
surveys), which are carried out at the intervals indicated by the
classification for the hull (usually at five year intervals). During the special
survey, the vessel is thoroughly examined, including Non-Destructive Inspections
(“NDIs”) to determine the thickness of the steel structures. Should the
thickness be found to be less than class requirements, the classification
society will order steel renewals. The classification society may grant a
one-year grace period for completion of the special survey. Substantial amounts
of funds may have to be spent for steel renewals to pass a special survey if the
vessel experiences excessive wear and tear. In lieu of the special survey every
five years, depending on whether a grace period is granted, a ship-owner or
manager has the option of arranging with the classification society for the
vessel’s hull or machinery to be on a continuous survey cycle, in which every
part of the vessel would be surveyed within a five-year cycle. At an owner’s
application, the surveys required for class renewal may be split according to an
agreed schedule to extend over the entire period of class. This process is
referred to as ESP (Enhanced Survey Program) and CSM (Continuous Machinery
Survey).
Occasional Surveys which are
carried out as a result of unexpected events, e.g. an accident or other
circumstances requiring unscheduled attendance by the classification society for
re-confirming that the vessel maintains its class, following such an unexpected
event.
All areas subject to survey, as defined
by the classification society, are required to be surveyed at least once per
class period, unless shorter intervals between surveys are prescribed elsewhere.
The period between two subsequent surveys of each area must not exceed five
years.
Most vessels are also dry-docked every
30 to 36 months for inspection of the underwater parts and for repairs related
to inspections. If any defects are found, the classification surveyor will issue
a ‘‘recommendation’’ which must be rectified by the ship-owner within prescribed
time limits. Most insurance underwriters make it a condition for insurance
coverage that a vessel be certified as “in class” by a classification society
which is a member of the International Association of Classification Societies.
All of our vessels are certified as being “in class” by ABS, Lloyd’s, DNV and,
in the case of the M/T Aristofanis, China Classification Society. All
new and secondhand vessels that we may purchase must be certified prior to their
delivery under our standard agreements. If any vessel we contract to purchase is
not certified as “in class” on the date of closing, we will have no obligation
to take delivery of such vessel.
Risk
Management and Insurance
The operation of any ocean-going vessel
carries an inherent risk of catastrophic marine disasters, death or personal
injury and property losses caused by adverse weather conditions, mechanical
failures, human error, war, terrorism, piracy and other circumstances or events.
The occurrence of any of these events may result in loss of revenues or
increased costs or, in the case of marine disasters, catastrophic liabilities.
Although we believe our current insurance program is comprehensive, we cannot
insure against all risks, and we cannot be certain that all covered risks are
adequately insured against or that we will be able to achieve or maintain
similar levels of coverage throughout a vessel’s useful life. Furthermore, there
can be no guarantee that any specific claim will be paid by the insurer or that
it will always be possible to obtain insurance coverage at reasonable rates.
More stringent environmental regulations at times in the past have resulted in
increased costs for, and may result in the lack of availability of, insurance
against the risks of environmental damage or pollution. Moreover, under the
terms of our bareboat charters, the charterer provides for the insurance of the
vessel, and as a result, these vessels may not be adequately insured and/or in
some cases may be self-insured. Any uninsured or under-insured loss has the
potential to harm our business and financial condition or could materially
impair or end our ability to trade or operate.
We currently carry the traditional
range of main and liability insurance coverage for each of our vessels to
protect against most of the accident-related risks involved in the conduct of
our business. Specifically we carry:
|
|
●
|
Hull and machinery
insurance covers loss of or damage to a vessel due to marine perils
such as collisions, grounding and weather and the coverage is usually to
an agreed “insured value” which, as a matter of policy, is never less than
the particular vessel’s fair market value. Cover is subject to policy
deductibles which are always subject to
change.
|
|
|
●
|
Increased value insurance
augments hull and machinery insurance cover by providing a low-cost
means of increasing the insured value of the vessels in the event of a
total loss casualty.
|
|
|
●
|
Protection and indemnity
insurance is the principal coverage for third party liabilities and
indemnifies against such liabilities incurred while operating vessels,
including injury to the crew, third parties, cargo or third party property
loss (including oil pollution) for which the shipowner is responsible. We
carry the current maximum available amount of coverage for oil pollution
risks, $1.0 billion per vessel per
incident.
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|
|
●
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War Risks insurance
covers such items as piracy and
terrorism.
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|
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●
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Freight, Demurrage &
Defense cover is a form of legal costs insurance which responds as
appropriate to the costs of prosecuting or defending commercial (usually
uninsured operating) claims.
|
Not all risks are insured and not all
risks are insurable. The principal insurable risks which nevertheless remain
uninsured across the fleet are “loss of hire” and “strikes.” We do not insure
these risks because the related costs of such insurance are regarded as
disproportionate to the benefit.
The following table sets forth certain
information regarding our insurance coverage as of December 31,
2009.
|
Type
|
Aggregate Sum Insured For All Vessels in our
Existing Fleet*
|
|
|
Hull
and Machinery
|
$819.24
million (increased value insurance (including excess liabilities) provides
additional coverage).
|
|
|
Increased
Value (including Excess Liabilities)
|
Up
to $335.6 million additional coverage in total.
|
|
|
Protection
and Indemnity (P&I)
|
Pollution
liability claims: limited to $1.0 billion per vessel per
incident.
|
|
|
War
Risk
|
$1.2
billion
|
|
|
*Certain
of our bareboat charterers are responsible for the insurance on the
vessels. The values attributed to those vessels are in line with the
values agreed in the relevant charters as augmented by separate
insurances.
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The
International Product Tanker Industry
The international seaborne
transportation industry represents the most cost effective method of
transporting large volumes of crude oil and refined petroleum products. The
seaborne movement of refined petroleum products between regions addresses demand
and supply imbalances for such products caused by the lack of resources or
refining capacity in consuming countries. Global demand for the shipping of
refined products and crude oil has grown historically at a faster rate than the
demand for the refined products and the crude oil themselves. However, in 2008
and 2009, oil demand has contracted sharply as a result of the global economic
slowdown. The demand for product and crude oil tankers is cyclical and a
function of several factors, including the general strength of the economy,
location of oil production and the distance from refineries as well as refining
and consumption and world oil demand and supply. As a consequence of the
deterioration in the global oil products demand, the demand for product tankers
has deteriorated from the second quarter of 2009 onwards.
According
to a report issued on January 15, 2010 by the International Energy Agency (the
“IEA”), global oil product demand for 2009 was approximately 84.9
mb/d compared to 86.2 mbd during 2008. The IEA also projects 2010 oil
demand to grow by 1.7% to 86.3 mb/d. Growth is expected to be driven by non-OECD
countries, most notably Asia. Due to increasing environmental restrictions on
the building of refineries in the countries that belong to the Organization for
Economic Co-operation and Development (the “OECD”), additional refineries are
expected to continue to be built at locations far from such points of
consumption, resulting in refined product tankers being required to travel
longer distances on each voyage. The refining industry may respond to the
economic downturn and demand weakness, by reducing refinery operating rates and
by reducing or canceling plans for certain investment expansion plans,
including additional refining capacity. The worldwide financial and economic
downturn may continue to adversely affect demand for tankers, due to the
expected contraction in crude oil and oil product demand.
Competition
We operate in a highly fragmented,
highly diversified global market with many charterers, owners and operators of
vessels.
Competition for charters can be intense
and the ability to obtain favorable charters depends, in addition to price, on a
variety of other factors, including the location, size, age, condition and
acceptability of the vessel and its operator to the charterer and is frequently
tied to having an available vessel which has met the strict operational and
financial standards established by the oil major companies to pre-qualify or vet
tanker operators prior to entering into charters with them. Although we believe
that at the present time no single company has a dominant position in the
markets in which we compete, that could change and we may face substantial
competition for medium to long-term charters from a number of experienced
companies who may have greater resources or experience than we do when we try to
recharter our vessels, especially as a large number of our vessels will come off
charter during 2010. However, Capital Maritime is among a small number of ship
management companies that has undergone and successfully completed audits by six
major international oil companies in the last few years, including audits with
BP p.l.c., Chevron Corporation, ExxonMobil Corporation, Royal Dutch Shell plc,
StatoilHydro ASA, and Total S.A. We believe our ability
to comply with the rigorous standards of major oil companies, relative to less
qualified or experienced operators, allows us to effectively compete for new
charters.
Regulation
General
Our operations and our status as an
operator and manager of ships are significantly regulated by international
conventions, Class requirements, U.S. federal, state and local and fore