Part I Key Information The Partnership faces significant risks across industry, operations, financing, regulations, and its limited partnership structure Risk Factors Risks include market volatility, charterer dependency, high debt, complex regulations, partnership structure, and adverse tax implications - The company identifies the cyclical and volatile nature of the ocean-going LNG, container, and drybulk shipping industries as a primary risk, with charter rates and vessel values subject to significant fluctuation4552 - A key operational risk is the dependency on a limited number of charterers; for the year ended December 31, 2021, HMM and Hapag-Lloyd accounted for 29% and 24% of total revenues, respectively123124 - The company has significant indebtedness, totaling $1,317.4 million as of December 31, 2021, which could restrict operational flexibility and impact cash distributions203 - Financing arrangements contain restrictive covenants, including a maximum leverage ratio of 0.75 and a minimum security coverage ratio between 110% and 125%209 - There is a risk that U.S. tax authorities could classify the company as a Passive Foreign Investment Company (PFIC), leading to adverse tax consequences for U.S. unitholders320321 Information on the Partnership The Partnership's strategic fleet expansion into LNG carriers, business model, and regulatory environment are detailed History and Development of the Partnership Key 2021 activities included acquiring six LNG carriers, issuing bonds, and initiating a unit repurchase program - In 2021, CPLP acquired six 174,000 CBM latest generation X-DF LNG carriers from a related party for approximately $1.22 billion330331 - The company issued €150.0 million of senior unsecured bonds on the Athens Stock Exchange in October 2021 to partially finance the LNG carrier acquisitions335 - In February 2021, the Partnership acquired three 5,100 TEU Panamax container vessels for a total of $40.5 million333 - The Partnership sold two container vessels in 2021 for a total of $195.0 million332 - A unit repurchase program of up to $30.0 million was approved in January 2021, with $4.5 million in units repurchased during the year342 Business Overview The Partnership operates a modern fleet of 21 vessels under medium- to long-term charters for revenue stability Fleet Composition as of March 31, 2022 | Vessel Type | Number of Vessels | Total DWT (million) | Total Capacity | Average Age (years) | | :--- | :--- | :--- | :--- | :--- | | Neo-Panamax Container | 11 | 1.0 | 80,797 TEU | 10.5 | | Panamax Container | 3 | 0.2 | 15,267 TEU | 13.9 | | Capesize Bulk Carrier | 1 | 0.2 | N/A | 11.7 | | LNG Carrier | 6 | 0.5 | 1.0 million CBM | 0.9 | - The company's business strategy focuses on medium- to long-term fixed charters and accretive fleet expansion through its relationship with sponsor Capital Maritime357358 - All container and LNG carrier vessels are chartered under medium- to long-term charters with a remaining revenue-weighted duration of approximately 3.1 years and 3.2 years, respectively354355 - Operations are subject to extensive environmental regulations, including IMO 2020, ballast water management rules, and upcoming EEXI and CII regulations, which may require significant capital expenditure232454 Operating and Financial Review and Prospects Financial performance analysis shows significant 2021 revenue and net income growth driven by fleet expansion Operating Results Operating results for 2021 reflect a 31% revenue increase and a surge in net income due to fleet growth and vessel sales Consolidated Income Statement Data (in thousands USD) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenues | $184,665 | $140,865 | | Total operating expenses | $66,605 | $93,622 | | Gain on sale of vessels | ($46,812) | — | | Operating income | $118,060 | $47,243 | | Interest expense and finance cost | ($20,129) | ($16,741) | | Partnership's net income | $98,178 | $30,367 | - The $43.8 million increase in total revenues in 2021 was primarily due to a net increase in the average number of vessels, higher charter rates, and fewer off-hire days487 - Net income for 2021 was significantly boosted by a $46.8 million gain from the sale of two vessels484498 - Total vessel operating expenses increased by $8.4 million to $47.1 million in 2021, reflecting the larger fleet and higher costs of new LNG carriers493 Liquidity and Capital Resources Liquidity is supported by operating cash flow, though total debt increased significantly to fund vessel acquisitions Cash Flow Summary (in millions USD) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $111.2 | $80.7 | | Net Cash Used in Investing Activities | ($175.1) | ($185.2) | | Net Cash Provided by Financing Activities | $40.6 | $95.4 | - Total debt increased substantially to $1,317.4 million as of Dec 31, 2021, from $379.7 million in 2020, primarily to finance vessel acquisitions521 - Net cash used in investing activities was $175.1 million, reflecting $365.7 million for vessel acquisitions offset by $193.0 million from vessel sales518 - Financing arrangements require compliance with financial covenants, including a maximum leverage ratio of 0.75540 Critical Accounting Estimates Vessel impairment is the primary critical accounting estimate, with no impairment recorded despite some market value deficits - The primary critical accounting estimate is the impairment of vessels, reviewed whenever events indicate the carrying amount may not be recoverable552919 - As of December 31, 2021, the aggregate carrying value of certain vessels exceeded their market value by approximately $3.3 million, an improvement from a $57.0 million deficit in 2020553 - Despite the market value deficit, no impairment charge was required for 2021 or 2020, as undiscounted projected cash flows exceeded carrying values556563 - The impairment analysis is highly sensitive to future time charter rates; an impairment would be triggered if rates declined by 25.2% from their ten-year historical average562 Directors, Senior Management and Employees The Partnership is managed by its General Partner and an independent-majority Board, with no direct employees - The Partnership is managed by its General Partner, Capital GP L.L.C., under the oversight of a seven-member Board of Directors565566567 - The key executive officers of the General Partner are Gerasimos (Jerry) Kalogiratos (CEO), Nikolaos Kalapotharakos (CFO), and Spyridon Leousis (CCO)571573 - The Partnership has no direct employees and relies on the officers of its General Partner and employees of its Managers for operations600 - For 2021, directors received $0.5 million in cash compensation, and the General Partner was reimbursed $1.88 million for executive services589590 - The Board has an Audit Committee, a Conflicts Committee, and a Compensation Committee, all comprised solely of independent directors595 Major Unitholders and Related-Party Transactions The Marinakis family is the largest unitholder, and numerous transactions occur with related entities like Capital Maritime Major Unitholders (as of early 2022) | Beneficial Owner | Common Units Owned | Percentage of Total | | :--- | :--- | :--- | | Capital Maritime (Marinakis family) | 3,887,694 | 20.2% | | Capital Gas Corp. (Marinakis family) | 1,153,846 | 6.0% | | Donald Smith & Co., Inc. | 1,442,246 | 7.5% | - In 2021, the Partnership acquired six LNG carriers and three container vessels from related parties Capital Maritime and CGC Operating Corp622626 - The Partnership has management agreements with related parties Capital-Executive and Capital Gas for commercial and technical management of its fleet617627628 - Significant potential for conflicts of interest exists due to the overlapping management and ownership structure with the General Partner and Capital Maritime636639 Financial Information The cash distribution policy is based on 'available cash' and includes a tiered incentive structure for the General Partner - The Partnership's policy is to distribute all of its 'available cash' quarterly, less reserves established by the board682683 - Distributions are characterized as from 'operating surplus' first; excess distributions are a return of capital from 'capital surplus'697708709 - The Partnership has a tiered incentive distribution rights (IDR) structure, where the General Partner receives an increasing percentage of cash flow (up to 35%) above certain thresholds713714 - In 2019, a subsidiary reached a settlement with the U.S. DOJ for oil record book violations, paying a $500,000 fine681 Additional Information The Partnership is a Marshall Islands entity taxed as a U.S. corporation, facing potential PFIC classification risk - The Partnership is organized in the Republic of the Marshall Islands and is not subject to Marshall Islands income tax744 - For U.S. federal income tax purposes, the Partnership has elected to be treated as a corporation751 - The Partnership believes it qualifies for the Section 883 Exemption, which exempts its U.S.-source international transportation income from U.S. federal income tax756757 - There is a risk the Partnership could be classified as a Passive Foreign Investment Company (PFIC), which would result in a disadvantageous U.S. tax regime for its U.S. unitholders321777779 Quantitative and Qualitative Disclosures about Market Risk Market risk exposure includes interest rates on floating-rate debt, foreign exchange, and inflation - The Partnership is exposed to interest rate risk from floating-rate financing; a 100-basis-point increase in LIBOR would have increased 2021 interest expense by an estimated $4.6 million808809 - Foreign exchange risk related to the €150.0 million bonds has been managed through cross-currency swap agreements805 - The company faces credit risk concentration from its charterers and from placing cash deposits with a limited number of financial institutions810 - Inflation is expected to become a more significant factor, leading to increased operating, voyage, and financing costs811 Part II Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal controls were effective as of year-end 2021 - Management concluded that the Partnership's disclosure controls and procedures were effective as of December 31, 2021820821 - Management assessed the internal control over financial reporting and concluded it was effective as of December 31, 2021, based on the COSO framework822825 - The independent auditor, Deloitte, issued an unqualified attestation report on the effectiveness of the Partnership's internal control over financial reporting827828 Other Information Governance details include the audit committee financial expert, accountant fees, and a unit repurchase program - The Board of Directors has determined that director Abel Rasterhoff qualifies as an "audit committee financial expert"835 - The Partnership has adopted a Code of Business Conduct and Ethics that applies to all directors, officers, and employees838 Principal Accountant Fees (in thousands USD) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $276.2 | $267.6 | | Audit-Related Fees | $119.4 | — | | Tax Fees | $17.2 | $10.8 | | Total | $412.8 | $278.4 | - Under a unit repurchase program, the Partnership repurchased 382,250 common units for a total cost of $4.5 million during 2021848851 Part III Financial Statements Audited financial statements show significant asset growth and increased net income for the year ended December 31, 2021 Consolidated Balance Sheet Highlights (in thousands USD) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $20,373 | $47,336 | | Vessels, net | $1,781,858 | $712,197 | | Total Assets | $1,885,170 | $822,198 | | Current portion of long-term debt, net | $97,879 | $35,810 | | Long-term debt, net | $1,211,095 | $338,514 | | Total Liabilities | $1,359,706 | $400,120 | | Total Partners' Capital | $525,464 | $422,078 | Consolidated Statement of Comprehensive Income Highlights (in thousands USD) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $184,665 | $140,865 | $108,374 | | Operating income | $118,060 | $47,243 | $40,132 | | Net income from continuing operations | $98,178 | $30,367 | $24,421 | Consolidated Statement of Cash Flows Highlights (in thousands USD) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $111,164 | $80,682 | $45,277 | | Net cash used in investing activities | ($175,065) | ($185,247) | ($6,519) | | Net cash provided by / (used in) financing activities | $40,552 | $95,437 | ($179,142) |
Capital Product Partners L.P.(CPLP) - 2021 Q4 - Annual Report