PART I This section provides an overview of the Partnership's business, operational risks, financial performance, governance, and market exposures Item 3. Key Information This section details the principal risks of investing in the Partnership, encompassing industry, operational, financial, regulatory, and tax-related challenges Risk Factors The Partnership faces substantial risks from the cyclical shipping market, operational dependencies, significant debt, evolving regulations, and complex tax implications for unitholders - The ocean-going container and drybulk shipping industries are cyclical and volatile, with charter rates and profitability subject to fluctuations in supply and demand3132 - The Partnership derives all its revenues from a limited number of charterers, with HMM, CMA CGM, and Hapag-Lloyd accounting for 37%, 22%, and 20% of total revenues respectively in 202063 - The COVID-19 pandemic has negatively impacted operations through increased crewing costs, higher crew rotation expenses, and extended dry-docking durations5354 - The Partnership's financing arrangements contain restrictive covenants, including minimum liquidity of $500,000 per collateralized vessel and a minimum EBITDA to net interest expense ratio of 2.00 to 1.009899 - There is a risk that U.S. tax authorities could treat the Partnership as a Passive Foreign Investment Company (PFIC), resulting in adverse U.S. federal income tax consequences for unitholders149150151 Item 4. Information on the Partnership This section outlines the Partnership's history, strategic focus on container and drybulk vessels, fleet overview, and the extensive regulatory environment governing its operations History and Development of the Partnership This section details the Partnership's strategic shift to container and drybulk shipping, recent fleet expansions, and significant financing and divestment activities - In March 2019, the Partnership completed the DSS Transaction, spinning off its 25-vessel crude and product tanker business to focus on container and drybulk shipping15164 - The Partnership expanded its fleet by acquiring three 10,000 TEU container vessels in January 2020 for $162.6 million and three 5,100 TEU container vessels in February 2021 for $40.5 million157160 - On April 7, 2021, the Partnership agreed to sell the M/V CMA CGM Magdalena and the M/V Adonis for a total of $195.0 million156 Business Overview This section describes the Partnership's fleet of 17 vessels, its strategy of securing long-term charters, and its operations within a highly competitive and regulated global shipping industry - As of March 31, 2021, the fleet consists of 16 container vessels and one Capesize bulk carrier, with a revenue-weighted remaining charter duration of approximately 4.0 years170180 - Key business strategies include maintaining medium- to long-term fixed charters, expanding the fleet through accretive acquisitions, and adhering to rigorous safety and environmental standards171 Fleet Summary as of March 31, 2021 | Vessel Type | Number of Vessels | Total DWT (million) | Total TEU Capacity | Average Age (years) | | :--- | :--- | :--- | :--- | :--- | | Container Carrier | 16 | 1.5 | 114,640 | 9.6 | | Capesize Bulk Carrier | 1 | 0.2 | N/A | 10.7 | | Total Fleet | 17 | 1.7 | 114,640 | 9.7 | - The business operates under extensive regulation from international, national, and local authorities, including IMO, USCG, and EPA rules covering pollution, safety, and ballast water management195200 Item 5. Operating and Financial Review and Prospects This section analyzes the Partnership's financial performance, highlighting revenue growth, liquidity, debt levels, and critical accounting policies, particularly vessel impairment Operating Results This section details the Partnership's operating results for 2020, showing increased revenues and net income driven by fleet expansion and associated operational changes Financial Performance Summary (Continuing Operations) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $140.9M | $108.4M | | Total Operating Expenses | $93.6M | $68.2M | | Operating Income | $47.2M | $40.1M | | Net Income from Continuing Operations | $30.4M | $24.4M | - The increase in revenue was primarily due to a 2.8 vessel increase in the weighted average number of vessels in the fleet following the acquisition of three ships in January 2020227228 - Total vessel operating expenses rose to $38.7 million in 2020 from $30.5 million in 2019, reflecting the larger fleet size and costs associated with special surveys231 Liquidity and Capital Resources This section reviews the Partnership's liquidity, capital resources, and financing activities, including cash flow, debt levels, and sufficiency of working capital Cash Flow Summary | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $80.7M | $45.3M | | Net Cash Used in Investing Activities | ($185.3M) | ($6.5M) | | Net Cash from/(Used in) Financing Activities | $95.4M | ($179.1M) | - Total debt stood at $379.7 million as of December 31, 2020, an increase from $262.4 million at the end of 2019, primarily due to financing for vessel acquisitions242 - In 2020, the Partnership entered into new financing arrangements, including a $38.5 million term loan with HCOB and sale-leaseback transactions totaling $232.4 million with CMBFL and ICBCFL241246247248 Critical Accounting Policies This section focuses on the critical accounting policy for vessel impairment, detailing the assessment process and the significant assumptions involved in determining asset recoverability - The carrying value of vessels is a critical accounting estimate, with the aggregate carrying value of certain vessels exceeding their aggregate charter-free market value by approximately $57.0 million as of December 31, 2020259 - Despite the difference between carrying value and market value for some vessels, the Partnership concluded that the carrying amounts were recoverable based on undiscounted projected net operating cash flows260267 - The impairment test is highly sensitive to future time charter rate assumptions, with a 19.6% decline from the ten-year historical average rate required to trigger an impairment on the Cape vessel as of year-end 2020262264 Item 6. Directors, Senior Management and Employees This section outlines the Partnership's governance structure, key management personnel, reliance on the General Partner for operations, and board committee composition - The Partnership is managed by its General Partner, Capital GP L.L.C., with oversight from a seven-member Board of Directors, and the General Partner is owned by Mr. Miltiadis E. Marinakis271 - The Partnership has no employees and relies on the officers of its General Partner and the employees of its Manager to conduct its operations295 - For the year ended December 31, 2020, directors received aggregate cash compensation of $0.5 million, and the General Partner is paid $1.88 million per year for executive officer services287288 - The Board of Directors has established an Audit Committee, a Conflicts Committee, and a Compensation Committee, all comprised solely of independent directors290 Item 7. Major Unitholders and Related-Party Transactions This section details the Partnership's ownership structure, significant related-party transactions, and potential conflicts of interest arising from its relationships with the General Partner and Capital Maritime - As of April 20, 2021, the Marinakis family beneficially owned a 19.8% interest in the Partnership through Capital Maritime (17.9%) and the General Partner (1.9%)299 - The Partnership engages in significant related-party transactions, including vessel acquisitions from its sponsor, Capital Maritime, and management and administrative services from Capital-Executive and the General Partner302303307 - Potential conflicts of interest exist due to the relationships between the Partnership, its General Partner, and Capital Maritime, with the partnership agreement modifying fiduciary duties312314 Item 8. Financial Information This section covers legal proceedings and details the Partnership's quarterly cash distribution policy, including definitions of available cash and incentive distribution rights - The Partnership's policy is to distribute all of its 'available cash' quarterly, after establishing reserves for business conduct, capital expenditures, and debt compliance337338 - Distributions are characterized as from 'operating surplus' first, and the General Partner holds Incentive Distribution Rights (IDRs) entitling it to an increasing percentage of distributions after certain targets are met343352 - In September 2019, a subsidiary settled with the U.S. Department of Justice for oil record book violations on the M/V CMA CGM Amazon, paying a $500,000 fine and being placed on 30-month probation336 - Following the DSS Transaction, the Partnership adopted a new annual common unit quarterly distribution guidance of $0.315 per common unit341 Item 10. Additional Information This section provides supplementary information on material contracts, exchange controls, and a detailed analysis of tax considerations, including U.S. federal income tax implications - The Partnership is a Marshall Islands limited partnership and states that non-resident unitholders are not subject to Marshall Islands taxation on distributions or capital gains372 - For U.S. federal tax purposes, the Partnership has elected to be taxed as a corporation and believes it qualifies for the Section 883 exemption, exempting its U.S. source international shipping income from federal income tax376378 - The Partnership believes it is not a Passive Foreign Investment Company (PFIC), but notes a risk that the IRS could determine otherwise, leading to adverse tax consequences for U.S. Holders387 Item 11. Quantitative and Qualitative Disclosures about Market Risk This section details the Partnership's exposure to market risks, primarily interest rate fluctuations, and also addresses foreign exchange, credit, and inflation risks - The Partnership is exposed to interest rate risk as its financing arrangements have floating rates based on LIBOR, where a 100 basis point increase would have increased 2020 interest expense by approximately $3.7 million406 - Foreign exchange risk is not material, as revenues are generated in U.S. Dollars and less than 20% of expenses are in other currencies405 - Credit risk is concentrated in cash deposits with financial institutions and accounts receivable from a small number of charterers407 PART II This section details the Partnership's internal controls, governance practices, and other compliance-related disclosures Item 15. Controls and Procedures This section confirms the effectiveness of the Partnership's disclosure controls and internal control over financial reporting as of December 31, 2020, supported by management's assessment and an unqualified auditor's report - Management concluded that the Partnership's disclosure controls and procedures were effective as of December 31, 2020411 - Management assessed the internal control over financial reporting, based on the COSO framework, and concluded it was effective as of December 31, 2020412 - The independent registered public accounting firm, Deloitte, issued an unqualified opinion, stating that the Partnership maintained effective internal control over financial reporting as of December 31, 2020415 Item 16. Other Information This section covers governance details, including the audit committee financial expert, code of conduct, principal accountant fees, and the common unit repurchase program - The Board of Directors has determined that director Abel Rasterhoff qualifies as an audit committee financial expert420 Principal Accountant Fees (Deloitte) | Fees | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $267,600 | $529,700 | | Tax Fees | $10,800 | $10,800 | | Total | $278,400 | $540,500 | - On January 25, 2021, the Board approved a two-year, $30.0 million common unit repurchase program, with 164,038 units repurchased for $1.7 million as of April 20, 2021427 PART III This section presents the audited consolidated financial statements and supporting exhibits for the Partnership Item 18. Financial Statements This section presents the audited consolidated financial statements for the period ended December 31, 2020, including the auditor's report and notes, highlighting vessel impairment as a Critical Audit Matter - This section includes the complete audited consolidated financial statements and related notes for the three years in the period ended December 31, 2020433 - The independent auditor's report from Deloitte provides an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting440 - The auditor identified 'Vessel Impairment – Future Charter Rates' as a Critical Audit Matter, highlighting the challenging and subjective judgments management must make in estimating future charter rates for impairment testing442443 Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $822.2M | $703.5M | | Vessels, net | $712.2M | $576.9M | | Total Liabilities | $400.1M | $296.7M | | Total Long-term debt, net | $338.5M | $232.0M | | Total Partners' Capital | $422.1M | $406.7M | Item 19. Exhibits This section lists all exhibits filed with the annual report, including corporate governance documents, material contracts, and required certifications - Lists key corporate documents, including the Certificate of Limited Partnership and the Second Amended and Restated Agreement of Limited Partnership434 - Includes material contracts such as the 2017 Loan Agreement, the Amended and Restated Omnibus Agreement, and various management and services agreements434
Capital Product Partners L.P.(CPLP) - 2020 Q4 - Annual Report