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Capital Product Partners L.P. 20-F 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________________ FORM 20-F
(Mark
One)
OR
For
the fiscal year ended December 31, 2008
OR
For the transition period from
to
OR
Date of
event requiring this shell company report:
Commission
file number: 1-33373
_________________________
CAPITAL
PRODUCT PARTNERS L.P.
(Exact
name of Registrant as specified in its charter)
Republic
of The Marshall Islands
(Jurisdiction
of incorporation or organization)
3
Iassonos Street, Piraeus, 18537 Greece
+30
210 458 4950
(Address
and telephone number of principal executive offices)
_________________________
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each
class Name of each exchange
on which registered
Common
units representing limited partnership
interests Nasdaq Global
Market
Securities
registered or to be registered pursuant to Section 12(g) of the Act:None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of
the Act: None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
24,817,151
Common Units
506,472
General Partner Units
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES o
NO x
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
YES o
NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x
NO o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark which financial statements item the registrant has elected to
follow.
ITEM
17 o
ITEM 18 x
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
YES o
NO x
CAPITAL
PRODUCT PARTNERS L.P.
___________
This
annual report on Form 20-F (the “Annual Report”) should be read in conjunction
with our audited consolidated and combined financial statements and accompanying
notes included herein.
Statements
included in this Annual Report which are not historical facts (including
statements concerning plans and objectives of management for future operations
or economic performance, or assumptions related thereto) are forward-looking
statements. In addition, we and our representatives may from time to time make
other oral or written statements which are also forward-looking statements. Such
statements include, in particular, statements about our plans, strategies,
business prospects, changes and trends in our business, financial condition and
the markets in which we operate, and involve risks and uncertainties. In some
cases, you can identify the forward-looking statements by the use of words such
as “may”, “could”, “should”, “would,” “expect”, “plan”, “anticipate”, “intend”,
“forecast”, “believe”, “estimate”, “predict”, “propose”, “potential”, “continue”
or the negative of these terms or other comparable terminology. Forward-looking
statements appear in a number of places and include statements with respect to,
among other things:
These
and other forward-looking statements are made based upon management's current
plans, expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number of risks and uncertainties,
including those risks discussed in “Risk Factors.” The risks, uncertainties and
assumptions involve known and unknown risks and are inherently subject to
significant uncertainties and contingencies, many of which are beyond our
control. We caution that forward-looking statements are not guarantees and that
actual results could differ materially from those expressed or implied in the
forward-looking statements.
We
undertake no obligation to update any forward-looking statement or statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. New factors emerge from
time to time, and it is not possible for us to predict all of these factors.
Further, we cannot assess the impact of each such factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to be materially different from those contained in any forward- looking
statement. You should carefully review and consider the various disclosures
included in this Annual Report and in our other filings made with the Securities
and Exchange Commission (the “SEC”) that attempt to advise interested parties of
the risks and factors that may affect our business, prospects and results of
operations.
We have
derived the following selected historical financial and other data for the three
years ending December 31, 2008, from our audited consolidated and
combined financial statements for the years ended December 31, 2008, 2007 and
2006 (the “Financial Statements”) respectively, appearing elsewhere in this
Annual Report. The historical financial data presented for the period from
August 27, 2003 (inception) to December 31, 2005 have been derived from audited
financial statements not required to be included herein and are provided for
comparison purposes only. August 27, 2003 refers to the incorporation date of
the vessel-owning subsidiary of the M/T Aktoras and is the earliest
incorporation date of any of our vessel-owning subsidiaries.
Our
historical results are not necessarily indicative of the results that may be
expected in the future. Specifically, our financial statements for the period
from August 27, 2003 (inception) to December 31, 2004, and for the years ended
December 31, 2005 and 2006, are not comparable to our Financial Statements for
the years ended December 31, 2007 and 2008. Our initial public offering on April
3, 2007, and certain other transactions that occurred during 2007 and 2008,
including the delivery or acquisition of ten additional vessels, the new
charters our vessels entered into, the agreement we entered into with Capital
Ship Management for the provision of management and administrative services to
our fleet for a fixed fee and certain new financing and interest rate swap
arrangements we entered into, have affected our results of operations.
Furthermore, for the year ended December 31, 2006, only seven of the vessels in
our current fleet had been delivered to Capital Maritime and only two were in
operation for the full year. In addition, all the vessels comprising our fleet
at the time of our initial public offering as well as the subsequently acquired
M/T Attikos and the M/T Aristofanis were under construction during the periods
from August 27, 2003 (inception) to December 31, 2004 and during the year ended
December 31, 2005. The M/T Attikos and the M/T Aristofanis were delivered to
Capital Maritime in January and June 2005,
respectively. Consequently, the below table should be read together
with, and is qualified in its entirety by reference to, the Financial Statements
and the accompanying notes included elsewhere in this Annual Report. The table
should also be read together with “Item 5A: Operating and Financial Review and
Prospects—Management's Discussion and Analysis of Financial Condition and
Results of Operations”.
Our Financial Statements are prepared
in accordance with United States generally accepted accounting principles after
giving retroactive effect to the combination of entities under common control in
2008 as described in Note 1 (Basis of Presentation and General Information) to
the Financial Statements included herein. All numbers are in thousands of U.S.
Dollars, except numbers of units and earnings per unit.
___________
Some
of the following risks relate principally to the countries and the industry in
which we operate and the nature of our business in general. Although many of our
business risks are comparable to those of a corporation engaged in a similar
business would face, limited partner interests are inherently different from the
capital stock of a corporation. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. In particular, if any of the following
risks actually occurs, our business, financial condition or operating results
could be materially adversely affected. In that case, we might not be able to
pay distributions on our common units, the trading price of our common units
could decline, and you could lose all or part of your
investment.
Risks
Inherent in Our Business
A
protracted global economic slowdown or recession could have a material adverse
effect on our business, financial position and results of
operations.
Oil has
been one of the world’s primary energy sources for a number of decades. Global
economic growth has been strong in recent years which has had a significant
impact on shipping demand. However, during the second half of 2008 we started to
experience a major economic slowdown which is ongoing and the duration of which
is very difficult to forecast and which has, and is expected to continue to
have, a significant impact on world trade, including the oil trade. We expect
that a protracted economic downturn will adversely effect tanker rates over the
coming years as a number of oil consuming countries are either
already in or are entering a recession and the global economy is experiencing
the lowest growth rates observed over the last decades. This economic downturn
is expected to also sharply reduce the demand for oil and refined petroleum
products, and also potentially affect tanker demand and vessel values overall.
Even though our vessels are chartered under medium- or long-term charters, a
continuing negative change in global economic conditions is expected to have a
material adverse effect on our business, financial position, results of
operations and ability to pay dividends, as well as our future prospects and
ability to grow our fleet.
We
may not have sufficient cash from operations to enable us to pay the quarterly
distribution on our common units following the establishment of cash reserves
and payment of fees and expenses.
We may
not have sufficient cash available each quarter to pay the declared quarterly
distribution per common unit following establishment of cash reserves and
payment of fees and expenses. The amount of cash we can distribute on our common
units principally depends upon the amount of cash we generate from our
operations, which may fluctuate based on numerous factors generally described
under this “Risk Factors” heading, including, among other things:
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:
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:
From time
to time, we expect to enter into agreements with Capital Maritime or other
unaffiliated third parties to purchase additional newbuildings or other vessels
(or interests in vessel-owning companies). Between the time we enter
into an agreement for such purchase and delivery of the vessel, the market value
of similar vessels may decline. The market value of vessels is
influenced by the ability of buyers to access bank finance and equity capital
and any disruptions to the market and the possible lack of adequate available
finance may negatively affect such market values. Despite a decline
in market values we would still be required to purchase the vessel at the
agreed-upon price.
If we
sell a vessel at a time when the market value of our vessels has fallen, the
sale may be at less than the vessel’s carrying amount, resulting in a loss. In
addition, a decrease in the future charter rate and/or market value of our
vessels could potentially result in an impairment charge. A decline in the
market value of our vessels could also lead to a default under any prospective
credit facility to which we become a party, affect our ability to refinance our
existing credit facilities and/or limit our ability to obtain additional
financing.
We
have a limited operating history, which makes it more difficult to accurately
forecast our future results and may make it difficult for investors to evaluate
our business and our future prospects, both of which will increase the risk of
your investment.
We were
formed as an independent limited partnership on January 16, 2007. Only seven of
the vessels in our current fleet had been delivered to the relevant
vessel-owning subsidiaries as of December 31, 2006, and only two were in
operation for the full year then ended. Moreover, as these vessels were operated
as part of Capital Maritime’s fleet during the reporting period, the vessels
were operated in a different manner than they are currently operated, and thus
their historical results may not be indicative of their future results. Because
of our limited operating history, we lack extended historical financial and
operational data, making it more difficult for an investor to evaluate our
business, forecast our future revenues and other operating results, and assess
the merits and risks of an investment in our common units. This lack of
information will increase the risk of your investment. Moreover, you should
consider and evaluate our prospects in light of the risks and uncertainties
frequently encountered by companies with a limited operating history. These
risks and difficulties include challenges in accurate financial planning as a
result of limited historical data and the uncertainties resulting from having
had a relatively limited time period in which to implement and evaluate our
business strategies as compared to older companies with longer operating
histories. Our failure to address these risks and difficulties successfully
could materially harm our business and operating results.
We
must make substantial capital expenditures to maintain the operating capacity of
our fleet, which will reduce our cash available for distribution. In addition,
each quarter our board of directors is required to deduct estimated maintenance
and replacement capital expenditures from operating surplus, which may result in
less cash available to unitholders than if actual maintenance and replacement
capital expenditures were deducted.
We must
make substantial capital expenditures to maintain, over the long term, the
operating capacity of our fleet. These maintenance and replacement capital
expenditures include capital expenditures associated with drydocking a vessel,
modifying an existing vessel or acquiring a new vessel to the extent these
expenditures are incurred to maintain the operating capacity of our fleet. These
expenditures could increase as a result of changes in:
Our
significant maintenance and replacement capital expenditures will reduce the
amount of cash we have available for distribution to our unitholders. Any costs
associated with scheduled drydocking are included in a fixed daily fee of $5,500
per time chartered vessel ($8,500 for the M/T Amore Mio II), that we pay Capital
Ship Management under a management agreement, for an initial term of
approximately five years from the time we take delivery of each vessel, which
includes the expenses for its next scheduled special or intermediate survey, as
applicable. In the event our management agreement is not renewed or is
materially amended, we may have to separately deduct estimated capital
expenditures associated with drydocking from our operating surplus in addition
to estimated replacement capital expenditures.
Our
partnership agreement requires our board of directors to deduct estimated,
rather than actual, maintenance and replacement capital expenditures from
operating surplus each quarter in an effort to reduce fluctuations in operating
surplus. The amount of estimated capital expenditures deducted from operating
surplus is subject to review and change by the conflicts committee at least once
a year. In years when estimated capital expenditures are higher than actual
capital expenditures, the amount of cash available for distribution to
unitholders will be lower than if actual capital expenditures were deducted from
operating surplus. If our board of directors underestimates the appropriate
level of estimated maintenance and replacement capital expenditures, we may have
less cash available for distribution in future periods when actual capital
expenditures exceed our previous estimates.
If
Capital Maritime or any third party seller we may contract with in the future
for the purchase of newbuildings fails to make construction payments for such
vessels, the shipyard may rescind the purchase contract and we may lose access
to such vessels or need to finance such vessels before they begin operating,
which could harm our business and our ability to make cash
distributions.
The seven
newbuildings we have acquired since our initial public offering on the Nasdaq
Global market on April 3, 2007 (the “IPO”) have all been contracted directly by
Capital Maritime and all costs for the construction and delivery of such vessels
have been incurred by Capital Maritime. In the future, we may enter into similar
arrangements with Capital Maritime or other third parties for the acquisition of
newbuildings. If Capital Maritime or any third party sellers we contract with in
the future fail to make construction payments for the newbuildings after
receiving notice by the shipbuilder following nonpayment on any installment due
date, the shipbuilder could rescind the newbuilding purchase contract. As a
result of such default, Capital Maritime or the third party seller could lose
all or part of the installment payments made prior to such default, and we could
either lose access to such newbuilding or any future vessels we contract to
acquire or may need to finance such vessels before they begin operating and
generating voyage revenues, which could harm our business and reduce our ability
to make cash distributions.
If
we finance the purchase of any additional vessels we acquire in the future
through cash from operations, by increasing our indebtedness or
by issuing debt or equity securities, our ability to make cash
distributions may be diminished, our financial leverage could increase or our
unitholders could be diluted. In addition, if we expand the size of our fleet by
directly contracting newbuildings in the future, we generally will be required
to make significant installment payments for such acquisitions prior to their
delivery and generation of revenue.
The
actual cost of a new product or crude oil tanker varies significantly depending
on the market price charged by shipyards, the size and specifications of the
vessel, whether a charter is attached to the vessel and the terms of such
charter, governmental regulations and maritime self-regulatory organization
standards. The total delivered cost of a vessel will be higher and include
financing, construction supervision, vessel start-up and other
costs.
To date,
all the newbuildings we have acquired have been contracted directly by Capital
Maritime and all costs for the construction and delivery of these vessels have
been incurred by Capital Maritime. As of February 28, 2009, we had taken
delivery of seven newbuildings and purchased three additional vessels from
Capital Maritime. We have financed the purchase of these vessels either with
debt, or partly with debt, cash and partly by issuing additional equity
securities. If we issue additional common units or other equity
securities, your ownership interest in us will be diluted. Please read “—We may
issue additional equity securities without your approval, which would dilute
your ownership interest” below.
If we
elect to expand our fleet in the future by entering into contracts for
newbuildings directly with shipyards, we generally will be required to make
installment payments prior to their delivery. We typically must pay 5% to 25% of
the purchase price of a vessel upon signing the purchase contract, even though
delivery of the completed vessel will not occur until much later (approximately
18-36 months later for current orders) which could reduce cash available for
distributions to unitholders. If we finance these acquisition costs by issuing
debt or equity securities, we will increase the aggregate amount of interest
payments or quarterly distributions we must make prior to generating cash from
the operation of the newbuilding.
To fund
the acquisition price of any additional vessels we may contract to purchase from
Capital Maritime or other third parties and other related capital expenditures,
we will be required to use cash from operations or incur borrowings or raise
capital through the sale of debt or additional equity securities. Use of cash
from operations will reduce cash available for distributions to unitholders.
Even if we are successful in obtaining necessary funds, the terms of such
financings could limit our ability to pay cash distributions to unitholders.
Incurring additional debt may significantly increase our interest expense and
financial leverage, and issuing additional equity securities may result in
significant unitholder dilution and would increase the aggregate amount of cash
required to meet our quarterly distributions to unitholders, which could have a
material adverse effect on our ability to make cash distributions.
Our
ability to obtain bank financing and/or to access the capital markets for future
equity offerings may be limited by prevailing economic conditions. The
restrictions imposed by our credit facilities may also limit our ability to
access such financing, even if it is available. If we are unable to obtain
financing or access the capital markets, we may be unable to complete any future
purchases of vessels from Capital Maritime or from third parties.
Given the
prevailing market and economic conditions, including today’s financial turmoil
affecting the world’s debt, credit and capital markets, the ability of banks and
credit institutions to finance new projects, including the acquisition of new
vessels in the future, is uncertain. In addition, our ability to obtain bank
financing or to access the capital markets for future offerings may be limited
by our financial condition at the time of any such financing or offering, as
well as by adverse market conditions resulting from, among other things, general
economic conditions, weakness in the financial markets and contingencies and
uncertainties that are beyond our control. The restrictions imposed by our
credit facilities, including the obligation to comply with certain asset
maintenance and other ratios may further restrict our ability to access
available financing. Our failure to obtain the funds for necessary
future capital expenditures could have a material adverse effect on our
business, results of operations and financial condition and on our ability to
make cash distributions. In addition to a major global economic slowdown, we
have been facing, and continue to face, a severe deterioration in the banking
and credit world resulting in potentially higher interest costs and overall
limited availability of liquidity. As a result, the prevailing market and
economic conditions may affect our ability to complete any future purchases of vessels
from Capital Maritime or from third parties.
Our
debt levels may limit our flexibility in obtaining additional financing and in
pursuing other business opportunities.
We
entered into a $370.0 million revolving credit facility on March 22, 2007, which
was amended on September 19, 2007 and June 11, 2008 (our “existing credit
facility”), and a further $350.0 million revolving credit facility on March 19,
2008 (our “new credit facility” and together with our “existing credit
facility”, our “credit facilities”). As of December 31, 2008, we had
drawn $366.5 million under our existing credit facility and $107.5 million under
our new credit facility, and had $3.5 and $242.5 million available,
respectively. For more information regarding the terms of our credit facilities,
please read “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources—Borrowings—Revolving
Credit Facilities” below. Our level of debt could have important consequences to
us, including the following:
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:
Our
credit facilities also require us to comply with the ISM Code and to maintain
valid safety management certificates and documents of compliance at all
times.
In
addition, our credit facilities require us to:
We are
also required to maintain an aggregate fair market value of our financed vessels
equal to 125% of the aggregate amount outstanding under each credit
facility.
Our
ability to comply with the covenants and restrictions contained in our credit
facilities and any other debt instruments we may enter into in the future may be
affected by events beyond our control, including prevailing economic, financial
and industry conditions. If market or other economic conditions deteriorate, our
ability to comply with these covenants may be impaired. If we are in breach of
any of the restrictions, covenants, ratios or tests in our credit facilities,
especially if we trigger a cross-default currently contained in our credit
facilities or any
interest rate swap agreements we have entered into pursuant to their
terms, a significant portion of our obligations may become immediately
due and payable, and our lenders’ commitment to make further loans to us may
terminate. We may not have, or be able to obtain, sufficient funds to make these
accelerated payments. In addition, obligations under our credit facilities are
secured by our vessels, and if we are unable to repay debt under the credit
facilities, the lenders could seek to foreclose on those assets.
Decreases
in asset values due to circumstances outside of our control may limit our
ability to make further draw-downs under our credit facilities which may limit
our ability to purchase additional vessels in the future. In addition, if asset
values decrease significantly, we may have to pre-pay part of our outstanding
debt in order to remain in compliance with covenants under our credit
facilities.
Our
credit facilities require that we maintain an aggregate fair market value of the
vessels in our fleet equal to approximately 138% of the aggregate amount
outstanding under each credit facility. Any contemplated vessel
acquisitions will have to be at levels that do not impair the required ratios.
The current severe economic slowdown has had an adverse effect on tanker asset
values which is likely to persist if the economic slowdown
continues. If the estimated asset values of the vessels in our fleet
continue to decrease, such decreases may limit the amounts we can drawdown under
our credit facilities to purchase additional vessels and our ability to expand
our fleet. In addition, we may be obligated to pre-pay part of our outstanding
debt in order to remain in compliance with the relevant covenants in our credit
facilities. As a result, such decreases could have a material adverse effect on
our business, results of operations and financial condition and our ability to
make cash distributions.
Restrictions
in our debt agreements may prevent us from paying distributions.
Our
payment of interest and, following the end of the relevant non-amortizing
periods, principal on our debt will reduce cash available for distribution on
our units. In addition, our credit facilities prohibit the payment of
distributions if we are not in compliance with certain financial covenants
or upon the occurrence of an event of default or if the fair market
value of the vessels in our fleet is less than 138% of the aggregate amount
outstanding under each of our credit facilities.
Events of
default under our credit facilities include:
We
anticipate that any subsequent refinancing of our current debt or any new debt
could have similar or more onerous restrictions. For more information regarding
our financing arrangements, please read "Item 5A: Operating and Financial Review
and Prospects —Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
We
currently derive all of our revenues from a limited number of customers, and the
loss of any customer or charter or vessel could result in a significant loss of
revenues and cash flow.
We have
derived, and believe that we will continue to derive, all of our revenues and
cash flow from a limited number of customers. For the year ended December 31,
2008, BP Shipping Limited and Morgan Stanley Capital Group Inc. accounted for
54% and 33% of our revenues, respectively. For the year ended December 31, 2007,
these customers accounted for 58% and 24% of our revenues, respectively. For the
year ended December 31, 2006, BP Shipping Limited, Canterbury Tankers Inc, Shell
International Trading & Shipping Company Ltd. and Morgan Stanley Capital
Group Inc. accounted for 42%, 20%, 20% and 18% of our revenues,
respectively. In March and April 2008, we took delivery of the M/T Amore Mio II
and the M/T Aristofanis, which are chartered to BP Shipping Limited and Shell
International Trading & Shipping Company Ltd., respectively, and in January,
June and August 2008 we took delivery of three newbuildings, the M/T Alexandros
II, the M/T Aristotelis II and the M/T Aris II, chartered to subsidiaries of
Overseas Shipholding Group Inc., increasing the number of our customers for 2008
to five. We could lose a customer or the benefits of a charter if:
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:
If
delivery of any vessel we contract to acquire in the future is materially
delayed, it could adversely affect our results of operations and financial
condition and our ability to make cash distributions.
We
depend on Capital Maritime and its affiliates to assist us in operating and
expanding our business.
Pursuant
to a management agreement and an administrative services agreement between us
and Capital Ship Management, Capital Ship Management provides significant
commercial and technical management services (including the commercial and
technical management of our vessels, class certifications, vessel maintenance
and crewing, purchasing and insurance and shipyard supervision) as well as
administrative, financial and other support services to us. Please read “Item
7B: Related Party Transactions—Management Agreement” and “—Administrative
Services Agreement” below. Our operational success and ability to execute our
growth strategy will depend significantly upon Capital Ship Management’s
satisfactory performance of these services. Our business will be harmed if
Capital Ship Management fails to perform these services satisfactorily, if
Capital Ship Management cancels or materially amends either of these agreements,
or if Capital Ship Management stops providing these services to us. We may also
in the future contract with Capital Maritime for it to have newbuildings
constructed on our behalf and to incur the construction-related financing. We
would purchase the vessels on or after delivery based on an agreed-upon
price.
Our
ability to enter into new charters and expand our customer relationships will
depend largely on our ability to leverage our relationship with Capital Maritime
and its reputation and relationships in the shipping industry, including its
ability to qualify for long term business with certain oil majors. If Capital
Maritime suffers material damage to its reputation or relationships, it may harm
our ability to:
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:
The refining industry may respond
to the economic downturn and demand weakness by reducing operating rates and by
reducing or cancelling certain investment expansion plans, including plans
for additional refining capacity. Reduced demand for refined products and crude
oil and the shipping of refined products or crude oil or the increased
availability of pipelines used to transport refined products or crude oil, would
have a material adverse effect on our future growth and could harm our business,
results of operations and financial condition.
Our
growth depends on our ability to expand relationships with existing customers
and obtain new customers, for which we will face substantial
competition.
Medium-
to long-term time charters and bareboat charters have the potential to provide
income at pre-determined rates over more extended periods of time. However, the
process for obtaining longer term time charters and bareboat charters is highly
competitive and generally involves a lengthy, intensive and continuous screening
and vetting process and the submission of competitive bids that often extends
for several months. In addition to the quality, age and suitability of the
vessel, longer term shipping contracts tend to be awarded based upon a variety
of other factors relating to the vessel operator further described below under
“Our vessels’ present and future employment could be adversely affected by an
inability to clear the oil majors’ risk assessment process”.
In
addition to having to meet the stringent requirements set out by charterers, it
is likely that we will also face substantial competition from a number of
competitors who may have greater financial resources, stronger reputation or
experience than we do when we try to recharter our vessels. It is also likely
that we will face increased numbers of competitors entering into our
transportation sectors, including in the ice class sector. Increased competition
may cause greater price competition, especially for medium- to long-term
charters.
As a
result of these factors, we may be unable to expand our relationships with
existing customers or obtain new customers for medium- to long-term time
charters or bareboat charters on a profitable basis, if at all. Even if we are
successful in employing our vessels under longer term time charters or bareboat
charters, our vessels will not be available for trading in the spot market
during an upturn in the tanker market cycle, when spot trading may be more
profitable. If we cannot successfully employ our vessels in profitable time
charters our results of operations and operating cash flow could be adversely
affected.
Our
vessels’ present and future employment could be adversely affected by an
inability to clear the oil majors’ risk assessment process.
Shipping,
and especially crude oil, refined product and chemical tankers have been, and
will remain, heavily regulated. The so called “oil majors” companies, together
with a number of commodities traders, represent a significant percentage of the
production, trading and shipping logistics (terminals) of crude oil and refined
products worldwide. Concerns for the environment have led the oil majors to
develop and implement a strict ongoing due diligence process when selecting
their commercial partners. This vetting process has evolved into a sophisticated
and comprehensive risk assessment of both the vessel operator and the vessel,
including physical ship inspections, completion of vessel inspection
questionnaires performed by accredited inspectors and the production of
comprehensive risk assessment reports. In the case of term charter
relationships, additional factors are considered when awarding such contracts,
including:
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:
Unlike
newbuildings, existing vessels typically do not carry warranties as to their
condition. While we generally inspect existing vessels prior to purchase, such
an inspection would normally not provide us with as much knowledge of a vessel’s
condition as we would possess if it had been built for us and operated by us
during its life. Repairs and maintenance costs for existing vessels are
difficult to predict and may be substantially higher than for vessels we have
operated since they were built. These costs could decrease our cash flow and
reduce our liquidity.
The
vessels that currently make up our fleet, as well as the six vessels we may
purchase from Capital Maritime under our omnibus agreement, have been, or will
be, built in accordance with custom designs from three different shipyards, and
the vessels from each respective shipyard are the same in all material respects.
As a result, any latent defect discovered in one vessel will likely affect all
of our vessels.
The
vessels that make up our fleet, with the exception of the M/T Amore Mio II, as
well as the six vessels in Capital Maritime’s fleet for which we have been
granted a right of first offer, are, or will be, based on standard designs from
Hyundai MIPO Dockyard Co., Ltd., South Korea, STX Shipbuilding Co., Ltd., South
Korea and Baima Shipyard, China, and have been customized by Capital Maritime,
in some cases in consultation with the charterers of the vessel, and are, or
will be, uniform in all material respects. All vessels have the same or similar
equipment. As a result, any latent design defect discovered in one of our
vessels will likely affect all of our other vessels in that class. As a result,
any equipment defect discovered may affect all of our vessels. Any disruptions
in the operation of our vessels resulting from defects could adversely affect
our receipt of revenues under the charters for the vessels
affected.
Certain
design features in our vessels have been modified by Capital Maritime to enhance
the commercial capability of our vessels and have not yet been tested. As a
result, we may encounter unforeseen expenses, complications, delays and other
unknown factors which could adversely affect our revenues.
Capital
Maritime has modified certain design features in our vessels which have not yet
been tested and as a result, they may not operate as intended. If these
modifications fail to enhance the commercial capability of our vessels as
intended or interfere with the operation of our vessels, we could face expensive
and time-consuming design modifications, delays in the operation of our vessels,
damaged customer relationships and harm to our reputation. Any disruptions in
the operation of our vessels resulting from the design modifications could
adversely affect our receipt of revenues under the charters for the vessels
affected.
Terrorist
attacks, increased acts of piracy, hostilities or war could lead to further
economic instability, increased costs and disruption of our
business.
Terrorist
attacks, such as the attacks that occurred in the United States on September 11,
2001, the bombings in Spain on March 11, 2004, the bombings in London on July 7,
2005, increased acts of piracy and hijacking of vessels off the coast of Somalia
and the Gulf of Aden, the ongoing conflicts in Iraq and Afghanistan and other
current and future conflicts may adversely affect our business, operating
results, financial condition, ability to raise capital and future growth.
Continuing hostilities in the Middle East may lead to additional armed conflicts
or to further acts of terrorism and civil disturbance in the United States or
elsewhere, which may contribute further to economic instability and disruption
of oil production and distribution, which could result in reduced demand for our
services. If any of our vessels is hijacked it would adversely affect our
receipt of revenues as well as lead to increased costs in order to achieve the
release of the vessel.
In
addition, oil facilities, shipyards, vessels, pipelines and oil and gas fields
could be targets of future terrorist attacks. Any such attacks could lead to,
among other things, bodily injury or loss of life, vessel or other property
damage, increased vessel operational costs, including insurance costs, and the
inability to transport oil and other refined products to or from certain
locations. Terrorist attacks, war or other events beyond our control that
adversely affect the distribution, production or transportation of oil and other
refined products to be shipped by us could entitle our customers to terminate
our charter contracts, which would harm our cash flow and our
business.
Our
operations expose us to political and governmental instability, which could harm
our business.
Our
operations may be adversely affected by changing or adverse political and
governmental conditions in the countries where our vessels are flagged or
registered and in the regions where we otherwise engage in business. Any
disruption caused by these factors may interfere with the operation of our
vessels, which could harm our business, financial condition and results of
operations. In particular, we derive a substantial portion of our revenues from
shipping oil and oil products from politically unstable regions. Past political
efforts to disrupt shipping in these regions, particularly in the Arabian Gulf,
have included attacks on ships and mining of waterways. In addition to acts of
terrorism, trading in this and other regions has also been subject, in limited
instances, to piracy. Our operations may also be adversely affected by
expropriation of vessels, taxes, regulation, tariffs, trade embargoes, economic
sanctions or a disruption of or limit to trading activities, or other adverse
events or circumstances in or affecting the countries and regions where we
operate or where we may operate in the future.
Marine
transportation is inherently risky, and an incident involving significant loss
of, or environmental contamination by, any of our vessels could harm our
reputation and business.
Our
vessels and their cargoes are at risk of being damaged or lost because of events
such as:
An
accident involving any of our vessels could result in any of the
following:
Any of
these results could have a material adverse effect on our business, financial
condition and operating results.
Our
insurance may be insufficient to cover losses that may occur to our property or
result from our operations.
The
operation of ocean-going vessels in international trade is inherently risky. All
risks may not be adequately insured against, and any particular claim may not be
paid. We do not currently maintain off-hire insurance, which would cover the
loss of revenue during extended vessel off-hire periods, such as those that
occur during an unscheduled drydocking due to damage to the vessel from
accidents. Accordingly, any extended vessel off-hire, due to an accident or
otherwise, could have a material adverse effect on our business and our ability
to pay distributions to our unitholders. Any claims covered by insurance would
be subject to deductibles, and since it is possible that a large number of
claims may be brought, the aggregate amount of these deductibles could be
material. Certain of our insurance coverage is maintained through mutual
protection and indemnity associations, and as a member of such associations we
may be required to make additional payments over and above budgeted premiums if
member claims exceed association reserves.
We may be
unable to procure adequate insurance coverage at commercially reasonable rates
in the future. For example, more stringent environmental regulations have led in
the past to increased costs for, and in the future may result in the lack of
availability of, insurance against risks of environmental damage or pollution. A
catastrophic oil spill or marine disaster could exceed our insurance coverage,
which could harm our business, financial condition and operating results. In
addition, certain of our vessels are under bareboat charters with BP Shipping
Limited and subsidiaries of Overseas Shipholding Group Inc. Under the terms of
these charters, the charterer provides for the insurance of the vessel and as a
result these vessels may not be adequately insured and/or in some cases may be
self-insured. Any uninsured or underinsured loss could harm our business and
financial condition. In addition, our insurance may be voidable by the insurers
as a result of certain of our actions, such as our ships failing to maintain
certification with applicable maritime self-regulatory
organizations.
Changes
in the insurance markets attributable to terrorist attacks may also make certain
types of insurance more difficult for us to obtain. In addition, the insurance
that may be available to us may be significantly more expensive than our
existing coverage.
The
maritime transportation industry is subject to substantial environmental and
other regulations, which may significantly limit our operations or increase our
expenses.
Our
operations are affected by extensive and changing international, national and
local environmental protection laws, regulations, treaties, conventions and
standards in force in international waters, the jurisdictional waters of the
countries in which our vessels operate, as well as the countries of our vessels’
registration. Many of these requirements are designed to reduce the risk of oil
spills, air emissions and other pollution, and to reduce potential negative
environmental effects associated with the maritime industry in general. Our
compliance with these requirements can be costly.
These
requirements can affect the resale value or useful lives of our vessels, require
a reduction in cargo capacity, ship modifications or operational changes or
restrictions, lead to decreased availability of insurance coverage for
environmental matters or result in the denial of access to certain
jurisdictional waters or ports, or detention in certain ports. Under local,
national and foreign laws, as well as international treaties and conventions, we
could incur material liabilities, including cleanup obligations, in the event
that there is a release of petroleum or other hazardous substances from our
vessels or otherwise in connection with our operations. We could also become
subject to personal injury or property damage claims relating to the release of
or exposure to hazardous materials associated with our current or historic
operations. Violations of or liabilities under environmental requirements also
can result in substantial penalties, fines and other sanctions, including, in
certain instances, seizure or detention of our vessels.
We could
incur significant costs, including cleanup costs, fines, penalties, third-party
claims and natural resource damages, as the result of an oil spill or other
liabilities under environmental laws. The United States Oil Pollution Act of
1990 (“OPA 90”) affects all vessel owners shipping oil or petroleum products to,
from or within the United States. OPA 90 allows for potentially unlimited
liability without regard to fault of owners, operators and bareboat charterers
of vessels for oil pollution in U.S. waters. Similarly, the International
Convention on Civil Liability for Oil Pollution Damage, 1969, as amended, which
has been adopted by most countries outside of the U.S., imposes liability for
oil pollution in international waters. OPA 90 expressly permits individual
states to impose their own liability regimes with regard to hazardous materials
and oil pollution incidents occurring within their boundaries. Coastal states in
the U.S. have enacted pollution prevention liability and response laws, many
providing for unlimited liability.
In
addition to complying with OPA 90, relevant U.S. Coast Guard regulations, IMO
regulations, such as Annex IV and Annex VI to the International Convention for
the Prevention of Pollution from Ships (“MARPOL”), EU directives and other
existing laws and regulations and those that may be adopted, shipowners may
incur significant additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for potential spills and in
obtaining insurance coverage. Government regulation of vessels, particularly in
the areas of safety and environmental requirements, can be expected to become
stricter in the future and require us to incur significant capital expenditure
on our vessels to keep them in compliance, or even to scrap or sell certain
vessels altogether.
For example, amendments to revise the
regulations of MARPOL regarding the prevention of air pollution from ships were
approved by the Marine Environment Protection Committee (“MEPC”) and formally
adopted at MEPC 58th session held in October 2008. The amendments establish a
series of progressive standards to further limit the sulphur content in fuel
oil, which would be phased in through 2020, and new tiers of nitrogen oxide
(“NOx”) emission standards for new marine diesel engines, depending on their
date of installation. The amendments are expected to enter into force
under the tacit acceptance procedure in July 2010, or on some other date
determined by the MEPC.
Further
legislation, or amendments to existing legislation, applicable to international
and national maritime trade is expected over the coming years in areas such as
ship recycling, sewage systems, emission control (including emissions of
greenhouse gases), ballast treatment and handling, etc. Currently, legislation
and regulations that would require more stringent controls of air emissions from
ocean-going vessels are pending at the federal and state level in the U.S. Such
legislation or regulations may require additional capital expenditures or
operating expenses (such as increased costs for low-sulfur fuel) in order for us
to maintain our vessels’ compliance with international and/or national
regulations.
In
addition, various jurisdictions are considering regulating the management of
ballast water to prevent the introduction of non-indigenous species considered
to be invasive. For example, the IMO has adopted the International Convention
for the Control and Management of Ships' Ballast Water and Sediments (the “BWM
Convention”), which calls for a phased introduction of mandatory ballast water
exchange requirements, to be replaced in time with mandatory concentration
limits. The BWM Convention will enter into force 12 months after it has been
adopted by 30 states, the combined merchant fleets of which represent not less
than 35% of the gross tonnage of the world's merchant shipping tonnage. As of
January 31, 2009, 17 states, representing about 15.35% of the world’s merchant
shipping tonnage, have ratified the BWM Convention. In the United States,
ballast water management legislation has been enacted in several states, and
federal legislation is currently pending in the U.S. Congress. In addition, the
U.S. Environmental Protection Agency has also adopted a rule which requires
commercial vessels to obtain a “Vessel General Permit” from the U.S. Coast Guard
in compliance with the Federal Water Pollution Control Act (the "Clean Water
Act") regulating the discharge of ballast water and other discharges into U.S.
waters. Significant expenditures for the installation of additional
equipment or new systems on board our vessels may be required in order to comply
with new regulations regarding ballast water management which may come into
effect.
Other
requirements may also come into force regarding the protection of endangered
species which could lead to changes in the routes our vessels follow or in
trading patterns generally and thus to additional capital
expenditures. Furthermore, new environmental regulations are expected
to come into effect following the agreement and execution of a G8 environmental
agreement.
Additionally,
as a result of marine accidents we believe that regulation of the shipping
industry will continue to become more stringent and more expensive for us and
our competitors. In recent years, the IMO and EU have both accelerated their
existing non-double-hull phase-out schedules in response to highly publicized
oil spills and other shipping incidents involving companies unrelated to us.
Future incidents may result in the adoption of even stricter laws and
regulations, which could limit our operations or our ability to do business and
which could have a material adverse effect on our business and financial
results.
Please
read “Item 4B: Business Overview—Regulation” below for a more detailed
discussion of the regulations applicable to our vessels.
We
have a limited history operating as a publicly traded entity.
We
completed our IPO on the Nasdaq Global Market on April 3, 2007 and have a
limited history operating as a publicly traded entity. As a publicly traded
limited partnership, we are required to comply with the SEC’s reporting
requirements and with corporate governance and related requirements of the U.S.
Sarbanes-Oxley Act, the SEC and the Nasdaq Global Market, on which our common
units are listed. Section 404 of the Sarbanes−Oxley Act (“SOX 404”) requires
that we evaluate and determine the effectiveness of our internal control over
financial reporting on an annual basis. If we have a material weakness in our
internal control over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. We have and will
continue to have to dedicate a significant amount of time and resources to
ensure compliance with the regulatory requirements of Section 404. We will
continue to work with our legal, accounting and financial advisors to identify
any areas in which changes should be made to our financial and management
control systems to manage our growth and our obligations as a public company.
However, these and other measures we may take may not be sufficient to allow us
to satisfy our obligations as a public company on a timely and reliable basis.
We have incurred and will continue to incur significant legal, accounting and
other expenses in complying with these and other applicable regulations. We
anticipate that our incremental general and administrative expenses as a
publicly traded limited partnership taxed as a corporation for U.S. federal
income tax purposes will include costs associated with annual reports to
unitholders, tax returns, investor relations, registrar and transfer agent’s
fees, incremental director and officer liability insurance costs and director
compensation.
The
crew employment agreements manning agents enter into on behalf of Capital
Maritime or any of its affiliates, including Capital Ship Management, our
manager, may not prevent labor interruptions and the failure to renegotiate
these agreements successfully in the future may disrupt our operations and
adversely affect our cash flows.
The crew
employment agreements that manning agents enter into on behalf of Capital
Maritime or any of its affiliates, including Capital Ship Management, our
manager, may not prevent labor interruptions and are subject to renegotiation in
the future. Any labor interruptions, including due to a failure to renegotiate
employment agreements with our crew members successfully could disrupt our
operations and could adversely affect our business, financial condition and
results of operations.
Risks
Inherent in an Investment in Us
Capital
Maritime and its affiliates may engage in competition with us.
Pursuant
to the omnibus agreement that we and Capital Maritime have entered into, Capital
Maritime and its controlled affiliates (other than us, our general partner and
our subsidiaries) generally will agree not to acquire, own or operate medium-
range tankers under time charters of two or more years without the consent of
our general partner. The omnibus agreement, however, contains significant
exceptions that may allow Capital Maritime or any of its controlled affiliates
to compete with us, which could harm our business. Please read “Item
7B: Related Party Transactions—Omnibus Agreement—Noncompetition”.
Unitholders
have limited voting rights and our partnership agreement restricts the voting
rights of unitholders owning 5% or more of our units.
Holders
of common units have only limited voting rights on matters affecting our
business. We will hold a meeting of the limited partners every year to elect one
or more members of our board of directors and to vote on any other matters that
are properly brought before the meeting. Common unitholders elect only four of
the seven members of our board of directors and holders of subordinated units do
not elect any members of the board. We do not currently have any outstanding
subordinated units. The elected directors will be elected on a staggered basis
and will serve for three-year terms. Our general partner in its sole discretion
has the right to appoint the remaining three directors and to set the terms for
which those directors will serve. The partnership agreement also contains
provisions limiting the ability of unitholders to call meetings or to acquire
information about our operations, as well as other provisions limiting the
unitholders’ ability to influence the manner or direction of management.
Unitholders will have no right to elect our general partner and our general
partner may not be removed except by a vote of the holders of at least 66⅔% of
the outstanding units, including any units owned by our general partner and its
affiliates, voting together as a single class and a majority vote of our board
of directors.
Our
partnership agreement further restricts unitholders’ voting rights by providing
that if any person or group, other than our general partner, its affiliates,
their transferees and persons who acquired such units with the prior approval of
our board of directors, owns beneficially 5% or more of any class of units then
outstanding, any such units owned by that person or group in excess of 4.9% may
not be voted on any matter and will not be considered to be outstanding when
sending notices of a meeting of unitholders, calculating required votes, except
for purposes of nominating a person for election to our board, determining the
presence of a quorum or for other similar purposes, unless required by law. The
voting rights of any such unitholders in excess of 4.9% will be redistributed
pro rata among the other unitholders holding less than 4.9% of the voting power
of all classes of units entitled to vote. As an affiliate of our general
partner, Capital Maritime is not subject to this limitation. Capital Maritime
owns a 46.6% interest in us, including 11,304,651 common units and a 2% interest
in us through its ownership of our general partner.
Our
general partner and its other affiliates own a controlling interest in us and
have conflicts of interest and limited fiduciary and contractual duties, which
may permit them to favor their own interests to your detriment.
Following
the early termination of the subordination period and the conversion of the
subordinated units to common on a one-for-one basis on February 14, 2008,
Capital Maritime owns a 46.6% interest in us, including 11,304,651 common units
and a 2% interest in us through its ownership of our general partner. The common
units owned by Capital Maritime have the same rights as our other outstanding
common units. Our general partner effectively controls our day-to-day affairs
consistent with policies and procedures adopted by and subject to the direction
of our board of directors. Our general partner and its affiliates and our
directors have a fiduciary duty to manage us in a manner beneficial to us and
our unitholders. However, the officers of our general partner have a fiduciary
duty to manage our general partner in a manner beneficial to Capital Maritime.
Furthermore, all of the officers of our general partner and certain of our
directors are directors or officers of Capital Maritime and its affiliates, and
as such they have fiduciary duties to Capital Maritime that may cause them to
pursue business strategies that disproportionately benefit Capital Maritime or
which otherwise are not in the best interests of us or our unitholders.
Conflicts of interest may arise between Capital Maritime and its affiliates,
including our general partner and its officers, on the one hand, and us and our
unitholders, on the other hand. As a result of these conflicts, our general
partner and its affiliates may favor their own interests over the interests of
our unitholders. Please read “—Our partnership agreement limits the fiduciary
duties of our general partner and our directors to our unitholders and restricts
the remedies available to unitholders for actions taken by our general partner
or our directors” below. These conflicts include, among others, the following
situations:
Although
a majority of our directors will over time be elected by common unitholders, our
general partner will likely have substantial influence on decisions made by our
board of directors. Please read “Item 7B: Related Party Transactions”
below.
The
vote of a majority of our common unitholders is required to amend the terms of
our partnership agreement. Following the early termination of the subordination
period and the conversion of the subordinated units to common units on a
one-for-one basis, Capital Maritime owns 45.6% of our common units and can
significantly impact any vote under the terms of our partnership agreement which
may allow Capital Maritime to favor its interests and may significantly affect
your rights under the partnership agreement. In addition, Capital Maritime is
not subject to the limitations on voting rights imposed on our other limited
partners.
On
January 30, 2009, we announced the payment of an exceptional non-recurring
distribution of $1.05 per unit for the fourth quarter of 2008, bringing annual
distributions to unitholders to $2.27 per unit for the year ended December 31,
2008, a level which under the terms of our partnership agreement resulted in the
early termination of the subordination period and the automatic conversion of
the subordinated units into common units. Following such conversion, Capital
Maritime owns a 46.6% interest in us, including 11,304,651common units and a 2%
interest in us through its ownership of our general partner. The common units
owned by Capital Maritime have the same rights as our other outstanding common
units.
Prior to
such conversion, certain actions, including the approval of any amendments to
the terms of the partnership agreement, required the approval of a majority of
each of the common and subordinated units, voting separately, or in certain
cases a higher percentage of common units. Following termination of the
subordination period a majority of common units (or in certain cases a higher
percentage), of which Capital Maritime owns 45.6%, will be required in order to
amend the terms of the partnership agreement or to reach certain decisions or
actions, including:
In
addition, prior to such conversion, any shortfall in the payment of the
quarterly distribution was borne first by the owners of the subordinated units.
Following such conversion the risk will be borne by our common unitholders,
including Capital Maritime, equally.
Our
partnership agreement further restricts unitholders’ voting rights by providing
that if any person, other than our general partner or its affiliates, their
transferees and persons who acquire units with the prior approval of our board
of directors owns beneficially 5% or more of any class of units then
outstanding, any such units owned by that person or group in excess of 4.9% may
not be voted on any matter and that the voting rights of any such unitholders in
excess of 4.9% will be redistributed pro rata among the other unitholders
holding less than 4.9% of the voting power of all classes of units entitled to
vote. See “—Unitholders have limited voting rights and our partnership agreement
restricts the voting rights of unitholders owning 5% or more of our units” above
for more information. As an affiliate of our general partner, Capital Maritime
is not subject to this limitation. Further to the above, Capital Maritime, which
holds 11,304,651 common units representing 45.6% of our common units and is our
largest unitholder, may propose amendments to the partnership agreement that may
favor its interests over yours and which may change or limit your rights under
the partnership agreement.
We
currently do not have any officers and expect to rely solely on officers of our
general partner, who face conflicts in the allocation of their time to our
business.
We do not
currently expect our board of directors to exercise its power to appoint
officers of Capital Product Partners L.P., and as a result, we expect to rely
solely on the officers of our general partner, who are not required to work
full-time on our affairs and who also work for affiliates of our general
partner, including Capital Maritime. For example, our general partner’s Chief
Executive Officer and Chief Financial Officer is also an executive officer of
Capital Maritime. The affiliates of our general partner conduct substantial
businesses and activities of their own in which we have no economic interest. As
a result, there could be material competition for the time and effort of the
officers of our general partner who also provide services to our general
partner’s affiliates, which could have a material adverse effect on our
business, results of operations and financial condition.
Our
partnership agreement limits our general partner’s and our directors’ fiduciary
duties to our unitholders and restricts the remedies available to unitholders
for actions taken by our general partner or our directors.
Our
partnership agreement contains provisions that reduce the standards to which our
general partner and directors would otherwise be held by Marshall Islands
law. For example, our partnership agreement:
In order
to become a limited partner of our partnership, a unitholder is required to
agree to be bound by the provisions in the partnership agreement, including the
provisions discussed above.
Fees
and cost reimbursements, which Capital Ship Management will determine for
services provided to us and certain of our subsidiaries, will be substantial,
may fluctuate, and will reduce our cash available for distribution to you. Such
fees and cost reimbursements may increase as the vessel costs environment
increases and due to other unforeseen events, and may change upon the expiration
of the management and administrative agreements currently in place.
We pay a
fixed daily fee for an initial term of approximately five years from the time we
take delivery of each vessel for services provided to us by Capital Ship
Management, and we reimburse Capital Ship Management for all expenses it incurs
on our behalf. The fixed daily fee to be paid to Capital Ship Management
includes all costs incurred in providing certain commercial and technical
management services to us, including vessel maintenance, crewing, purchasing and
insurance and also includes the expenses for each vessel’s next scheduled
special or intermediate survey, as applicable, and related
drydocking. In addition to the fixed daily fees payable under the
management agreement, Capital Ship Management is entitled to supplementary
remuneration for extraordinary fees and costs of any direct and indirect
expenses it reasonably incurs in providing these services which may vary from
time to time, and which includes, amongst others, certain costs associated with
the vetting of our vessels, repairs related to unforeseen extraordinary events
and insurance deductibles. For the year ended 31, December 2008, such fees amounted to
approximately $1.0 million. Such costs may further increase to reflect
unforeseen events and the continuing inflationary vessel costs environment. In
addition, Capital Ship Management provides us with administrative services,
including audit, legal, banking, investor relations, information technology and
insurance services, pursuant to an administrative services agreement with an
initial term of five years from the date of our initial public offering, and we
reimburse Capital Ship Management for all costs and expenses reasonably incurred
by it in connection with the provision of those services. Costs for these
services are not fixed and may fluctuate depending on our
requirements.
Going
forward, when we acquire new vessels or when the respective management
agreements for our vessels expire, we will have to enter into new agreements
with Capital Ship Management or a third party for the provision of the above
services. It is possible that any such new agreement may not be on the same or
similar terms as our existing agreements, and that the level of our operating
costs may change following any such renewal. Any increase in the costs and
expenses associated with the provision of these services by our manager in the
future, such as the costs of crews for our time chartered vessels and insurance,
will lead to an increase in the fees we will have to pay to Capital Ship
Management under any new agreements we enter into. The payment of fees to
Capital Ship Management and reimbursement of expenses to Capital Ship Management
could adversely affect our ability to pay cash distributions.
Our
partnership agreement contains provisions that may have the effect of
discouraging a person or group from attempting to remove our current management
or our general partner, and even if public unitholders are dissatisfied, they
will be unable to remove our general partner without Capital Maritime’s consent,
unless Capital Maritime’s ownership share in us is decreased, all of which could
diminish the trading price of our units.
Our
partnership agreement contains provisions that may have the effect of
discouraging a person or group from attempting to remove our current management
or our general partner.
The
effect of these provisions may be to diminish the price at which our units will
trade.
The
control of our general partner may be transferred to a third party without
unitholder consent.
Our
general partner may transfer its general partner interest to a third party in a
merger or in a sale of all or substantially all of its assets without the
consent of the unitholders. In addition, our partnership agreement does not
restrict the ability of the members of our general partner from transferring
their respective membership interests in our general partner to a third party.
Any such change in control of our general partner may affect the way we and our
operations are managed which could have a material adverse effect on our
business, results of operations or financial condition and our ability to make
cash distributions.
Substantial
future sales of our units in the public market could cause the price of our
units to fall.
We
have granted registration rights to Capital Maritime and certain affiliates of
Capital Maritime. These unitholders have the right, subject to some conditions,
to require us to file registration statements covering any of our common,
subordinated or other equity securities owned by them at such time or to include
those securities in registration statements that we may file for ourselves or
other unitholders. As of February 28, 2009 Capital Maritime owned 11,304,651
common units registered under our Registration Statement on Form F-3 dated
August 29, 2008, as amended, and certain incentive distribution rights. By
exercising their registration rights or selling a large number of units or other
securities, as the case may be, these unitholders could cause the price of our
units to decline.
We
may issue additional equity securities without your approval, which would dilute
your ownership interests.
We may,
without the approval of our unitholders, issue an unlimited number of additional
units or other equity securities, including securities to Capital Maritime. In
particular, we have financed a portion of the purchase price of the two
non-contracted vessels we acquired from Capital Maritime during the first half
of 2008 through the issuance of additional common units to Capital Maritime. The
issuance by us of additional units or other equity securities of equal or senior
rank will have the following effects:
In
establishing cash reserves, our board of directors may reduce the amount of cash
available for distribution to you.
Our
partnership agreement requires our general partner to deduct from operating
surplus cash reserves that it determines are necessary to fund our future
operating expenditures. These reserves will also affect the amount of cash
available for distribution to our unitholders. Our board of directors may also
establish reserves for distributions on any future subordinated units, but only
if those reserves will not prevent us from distributing the full quarterly
distribution, plus any arrearages, on the common units for the following four
quarters. We currently do not have any subordinated units outstanding. As
described above in “—Risks Inherent in Our Business—We must make substantial
capital expenditures to maintain the operating capacity of our fleet, which will
reduce our cash available for distribution. In addition, each quarter our board
of directors is required to deduct estimated maintenance and replacement capital
expenditures from operating surplus, which may result in less cash available to
unitholders than if actual maintenance and replacement capital expenditures were
deducted”, our partnership agreement requires our board of directors each
quarter to deduct from operating surplus estimated maintenance and replacement
capital expenditures, as opposed to actual expenditures, which could reduce the
amount of available cash for distribution. The amount of estimated maintenance
and replacement capital expenditures deducted from operating surplus is subject
to review and change by our board of directors at least once a year, provided
that any change must be approved by the conflicts committee of our board of
directors.
Our
general partner has a limited call right that may require you to sell your units
at an undesirable time or price.
If at any
time our general partner and its affiliates own more than 80% of the common
units our general partner will have the right, which it may assign to any of its
affiliates or to us, but not the obligation, to acquire all, but not less than
all, of the common units or subordinated units held by unaffiliated persons at a
price not less than their then-current market price. As a result, you may be
required to sell your common units or subordinated units at an undesirable time
or price and may not receive any return on your investment. You may also incur a
tax liability upon a sale of your units.
As
a result of an exceptional dividend distribution of $1.05 per unit made on
February 13, 2009 to unitholders of record on February 10, 2009, and in
accordance with the terms of our partnership agreement, all of our outstanding
subordinated units were automatically converted into common units on a
one-for-one basis as of February 14, 2009. As of February 28, 2009 Capital
Maritime, an affiliate of our general partner, owned a 46.6% interest in us,
including 11,304,651common units and a 2% interest in us through its ownership
of our general partner.
You
may not have limited liability if a court finds that unitholder action
constitutes control of our business.
As a
limited partner in a partnership organized under the laws of the Marshall
Islands, you could be held liable for our obligations to the same extent as a
general partner if you participate in the “control” of our business. Our general
partner generally has unlimited liability for the obligations of the
partnership, such as its debts and environmental liabilities, except for those
contractual obligations of the partnership that are expressly made without
recourse to our general partner. In addition, the limitations on the liability
of holders of limited partner interests for the obligations of a limited
partnership have not been clearly established in some jurisdictions in which we
do business. Please read “The Partnership Agreement—Limited Liability” for a
discussion of the implications of the limitations on liability to a
unitholder.
We
can borrow money to pay distributions, which would reduce the amount of credit
available to operate our business.
Our
partnership agreement will allow us to make working capital borrowings to pay
distributions. Accordingly, we can make distributions on all our units even
though cash generated by our operations may not be sufficient to pay such
distributions. Any working capital borrowings by us to make distributions will
reduce the amount of working capital borrowings we can make for operating our
business. For more information, please read “Item 5B: Operating and Financial
Review and Prospects—Liquidity and Capital Resources—Borrowings”.
Increases
in interest rates may cause the market price of our units to
decline.
An
increase in interest rates may cause a corresponding decline in demand for
equity investments in general, and in particular for yield based equity
investments such as our units. Any such increase in interest rates or reduction
in demand for our units resulting from other relatively more attractive
investment opportunities may cause the trading price of our units to
decline.
Unitholders
may have liability to repay distributions.
Under
some circumstances, unitholders may have to repay amounts wrongfully returned or
distributed to them. Under the Marshall Islands Act, we may not make a
distribution to you if the distribution would cause our liabilities to exceed
the fair value of our assets. Marshall Islands law provides that for a period of
three years from the date of the impermissible distribution, limited partners
who received the distribution and who knew at the time of the distribution that
it violated Marshall Islands law will be liable to the limited partnership for
the distribution amount. Assignees who become substituted limited partners are
liable for the obligations of the assignor to make contributions to the
partnership that are known to the assignee at the time it became a limited
partner and for unknown obligations if the liabilities could be determined from
the partnership agreement. Liabilities to partners on account of their
partnership interest and liabilities that are non-recourse to the partnership
are not counted for purposes of determining whether a distribution is
permitted.
We
have been organized as a limited partnership under the laws of the Republic of
The Marshall Islands, which does not have a well developed body of partnership
law.
Our
partnership affairs are governed by our partnership agreement and by the
Marshall Islands Act. The provisions of the Marshall Islands Act resemble
provisions of the limited partnership laws of a number of states in the United
States, most notably Delaware. The Marshall Islands Act also provides that it is
to be applied and construed to make it uniform with the Delaware Revised Uniform
Partnership Act and, so long as it does not conflict with the Marshall Islands
Act or decisions of the Marshall Islands courts, interpreted according to the
non-statutory law (or case law) of the State of Delaware. There have been,
however, few, if any, court cases in the Marshall Islands interpreting the
Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed
body of case law interpreting its limited partnership statute. Accordingly, we
cannot predict whether Marshall Islands courts would reach the same conclusions
as the courts in Delaware. For example, the rights of our unitholders and the
fiduciary responsibilities of our general partner under Marshall Islands law are
not as clearly established as under judicial precedent in existence in Delaware.
As a result, unitholders may have more difficulty in protecting their interests
in the face of actions by our general partner and its officers and directors
than would unitholders of a limited partnership formed in the United
States.
Because
we are organized under the laws of the Marshall Islands, it may be difficult to
serve us with legal process or enforce judgments against us, our directors or
our management.
We are
organized under the laws of The Marshall Islands as a limited
partnership. Our general partner is organized under the laws of The
Marshall Islands as a limited liability company. The Marshall Islands
has a less developed body of securities laws as compared to the United States
and provides protections for investors to a significantly lesser
extent.
Most of
our directors and the directors and officers of our general partner and those of
our subsidiaries are residents of countries other than the United
States. Substantially all of our and our subsidiaries’ assets and a
substantial portion of the assets of our directors and the directors and
officers of our general partner are located outside the United
States. Our business is operated primarily from our office in Greece.
As a result, it may be difficult or impossible for you to effect service of
process within the United States upon us, our directors, our general partner,
our subsidiaries or the directors and officers of our general partner or enforce
against us or them judgments obtained in United States courts if you believe
that your rights have been infringed under securities laws or otherwise,
including judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state of the United States. Even if
you are successful in bringing an action of this kind there is uncertainty as to
whether the courts of The Marshall Islands and of other jurisdictions would (1)
recognize or enforce against us, our directors, our general partner’s directors
or officers judgments of courts of the United States based on civil liability
provisions of applicable U.S. federal and state securities laws; or (2) impose
liabilities against us, our directors, our general partner or our general
partner’s directors and officers in original actions brought in The Marshall
Islands, based on these laws.
Tax
Risks
In
addition to the following risk factors, you should read “Item 10E: Taxation” for
a more complete discussion of the expected material U.S. federal and non-U.S.
income tax considerations relating to us and the ownership and disposition of
our units.
U.S.
tax authorities could treat us as a “passive foreign investment company”, which
could have adverse U.S. federal income tax consequences to U.S.
holders.
A foreign
entity taxed as a corporation for U.S. federal income tax purposes will be
treated as a “passive foreign investment company” (a “PFIC”), for U.S. federal
income tax purposes if at least 75.0% of its gross income for any taxable year
consists of certain types of “passive income”, or at least 50.0% of the average
value of the entity’s assets produce or are held for the production of those
types of “passive income”. For purposes of these tests, “passive income”
includes dividends, interest, gains from the sale or exchange of investment
property, and rents and royalties other than rents and royalties that are
received from unrelated parties in connection with the active conduct of a trade
or business. For purposes of these tests, income derived from the performance of
services does not constitute “passive income”. U.S. shareholders of a PFIC are
subject to a disadvantageous U.S. federal income tax regime with respect to the
income derived by the PFIC, the distributions they receive from the PFIC, and
the gain, if any, they derive from the sale or other disposition of their shares
in the PFIC.
Based on
our current and projected method of operation we do not believe that we have
been a PFIC nor do we expect to become a PFIC with respect to any future taxable
year. We intend to
treat our income from time chartering activities as non-passive income, and the
vessels engaged in those activities as non-passive assets, for PFIC
purposes. However, no assurance can be given that the Internal
Revenue Service (the “IRS”) will accept this position. Certain vessels in our
fleet are engaged in activities that may be characterized as passive for
PFIC purposes and the income from that portion of our fleet may be treated as
passive income for PFIC purposes. See “Item 10E: Taxation—PFIC Status and
Significant Tax Consequences”.
The
preferential tax rates applicable to qualified dividend income are temporary,
and the enactment of previously proposed legislation could affect whether
dividends paid by us constitute qualified dividend income eligible for the
preferential rate.
Certain
of our distributions may be treated as qualified dividend income eligible for
preferential rates of U.S. federal income tax to U.S. individual unitholders
(and certain other U.S. unitholders). In the absence of legislation extending
the term for these preferential tax rates, all dividends received by such U.S.
taxpayers in tax years beginning on January 1, 2011 or later will be taxed at
ordinary graduated tax rates. Please read “Item 10E: Taxation—U.S. Federal
Income Taxation of U.S. Holders—Distributions”.
In
addition, previously proposed legislation would deny the preferential rate of
U.S. federal income tax currently imposed on qualified dividend income with
respect to dividends received from a non-U.S. corporation, unless the non-U.S.
corporation either is eligible for benefits of a comprehensive income tax treaty
with the United States or is created or organized under the laws of a foreign
country that has a comprehensive income tax system. Because the Marshall Islands
has not entered into a comprehensive income tax treaty with the United States
and imposes only limited taxes on entities organized under its laws, it is
unlikely that we could satisfy either of these requirements. Consequently, if
this legislation were enacted the preferential tax rates of federal income tax
discussed under “Item 10E: Taxation—U.S. Federal Income Taxation of U.S.
Holders—Distributions” herein may no longer be applicable to distributions
received from us. As of the date hereof, it is not possible to predict with any
certainty whether this previously proposed legislation will be reintroduced and
enacted.
We
may have to pay tax on United States source income, which would reduce our
earnings.
Under the
Internal Revenue Code of 1986, as amended (the “Code”), 50% of the gross
shipping income of a vessel-owning or chartering corporation that is
attributable to transportation that both begins or ends, but that does not begin
and end, in the U.S. is characterized as U.S. source shipping income and such
income generally is subject to a 4% U.S. federal income tax without allowance
for deduction, unless that corporation qualifies for exemption from tax under
Section 883 of the Code. We believe that we and each of our subsidiaries will
qualify for this statutory tax exemption, and we will take this position for
U.S. federal income tax return reporting purposes. See “Item 10E: Taxation”.
However, there are factual circumstances, including some that may be beyond our
control, which could cause us to lose the benefit of this tax exemption. In
addition, our conclusion that we currently qualify for this exemption is based
upon legal authorities that do not expressly contemplate an organization
structure such as ours. Although we have elected to be treated as a corporation
for U.S. federal income tax purposes, for corporate law purposes we are
organized as a limited partnership under Marshall Islands law and our general
partner swill be responsible for managing our business and affairs and has been
granted certain veto rights over decisions of our board of directors. Therefore,
we can give no assurances that the IRS will not take a different position
regarding our qualification, or the qualification of any of our subsidiaries,
for this tax exemption.
If we or
our subsidiaries are not entitled to this exemption under Section 883 for any
taxable year, we or our subsidiaries generally would be subject for those years
to a 4% U.S. federal gross income tax on our U.S. source shipping income. The
imposition of this taxation could have a negative effect on our business and
would result in decreased earnings available for distribution to our
unitholders.
You
may be subject to income tax in one or more non-U.S. countries, including
Greece, as a result of owning our units if, under the laws of any such country,
we are considered to be carrying on business there. Such laws may require you to
file a tax return with and pay taxes to those countries.
We intend
that our affairs and the business of each of our controlled affiliates will be
conducted and operated in a manner that minimizes income taxes imposed upon us
and these controlled affiliates or which may be imposed upon you as a result of
owning our units. However, because we are organized as a partnership, there is a
risk in some jurisdictions that our activities and the activities of our
subsidiaries may be attributed to our unitholders for tax purposes and, thus,
that you will be subject to tax in one or more non-U.S. countries, including
Greece, as a result of owning our units if, under the laws of any such country,
we are considered to be carrying on business there. If you are subject to tax in
any such country, you may be required to file a tax return with and to pay tax
in that country based on your allocable share of our income. We may be required
to reduce distributions to you on account of any withholding obligations imposed
upon us by that country in respect of such allocation to you. The United States
may not allow a tax credit for any foreign income taxes that you directly or
indirectly incur.
We
believe we can conduct our activities in a manner so that our unitholders should
not be considered to be carrying on business in Greece solely as a consequence
of the acquisition, holding, disposition or redemption of our units. However,
the question of whether either we or any of our controlled affiliates will be
treated as carrying on business in any country, including Greece, will largely
be a question of fact determined through an analysis of contractual
arrangements, including the management agreement and the administrative services
agreement we will enter into with Capital Ship Management, and the way we
conduct business or operations, all of which may change over time. The laws of
Greece or any other foreign country may also change, which could cause the
country’s taxing authorities to determine that we are carrying on business in
such country and are subject to its taxation laws. Any foreign taxes imposed on
us or any subsidiaries will reduce our cash available for
distribution.
A.
History and Development of the Partnership
We are a
limited partnership incorporated as Capital Product Partners L.P. under the laws
of the Marshall Islands on January 16, 2007 by Capital Maritime, an
international shipping company with a long history of operating and investing in
the shipping markets. Our fleet currently consists of 18 double-hull, high
specification tankers including one of the largest Ice Class 1A medium range
(“MR”) product tanker fleets in the world based on number of vessels and
carrying capacity. We maintain our principal executive headquarters at 3
Iassonos Street, Piraeus, 18537 Greece and our telephone number is +30 210 4584
950.
On April
3, 2007, we completed our IPO of 13,512,500 common units at a price of $21.50
per unit. At the time of the IPO, Capital Maritime transferred all of the shares
of eight wholly owned subsidiaries, each of which owned a newly built, double
hull MR product tanker, to us and we entered into an agreement with Capital Ship
Management, a subsidiary of Capital Maritime, to provide management and
technical services in connection with these and future vessels. Since the IPO we
have taken delivery of seven newbuildings, which we had contracted to acquire at
the time of the IPO, and we have also acquired three additional, non-contracted,
vessels from Capital Maritime, greatly increasing the size of our fleet in terms
of both number of vessels and carrying capacity. The additional vessels were
purchased in part by issuing equity to Capital Maritime. Capital Maritime has
also granted us a right of first offer for any MR tankers in its fleet under
charter for two or more years, giving us the opportunity to purchase up to an
additional six vessels in the future. We intend to continue to
make strategic acquisitions and to take advantage of our relationship with
Capital Maritime in a prudent manner that is accretive to our unitholders and to
long-term distribution growth.
On
January 30, 2009, we announced the payment of an exceptional non-recurring
distribution of $1.05 per unit for the fourth quarter of 2008, bringing annual
distributions to unitholders to $2.27 per unit for the year ended December 31,
2008, a level which under the terms of our partnership agreement resulted in the
early termination of the subordination period and the automatic conversion of
the subordinated units into common units. Our board of directors unanimously
determined that taking into account the totality of relationships between the
parties involved, the payment of this exceptional distribution was in our best
interests taking into consideration the general economic conditions, our
business requirements, risks relating to our business as well as alternative
uses available for our cash. Following such conversion, Capital Maritime owns a
46.6% interest in us, including 11,304,651 common units and a 2% interest in us
through its ownership of our general partner, Capital GP L.L.C. The common units
owned by Capital Maritime have the same rights as our other outstanding common
units.
B.
Business Overview
Our
18 vessels trade on a worldwide basis and are capable of carrying crude oil,
refined oil products, such as gasoline, diesel, fuel oil and jet fuel, as well
as edible oils and certain chemicals such as ethanol and comply not only with
the strict regulatory standards that are currently in place but also with the
stricter regulatory standards that are currently expected to be implemented. We
charter our vessels under medium to long-term time and bareboat charters (two to
10 years, with an average remaining term of approximately 4.3 years as of
February 28, 2009) to large charterers such as BP Shipping Limited, Morgan
Stanley Capital Group Inc., Trafigura Beheer B.V., Shell International
Trading & Shipping Company Ltd. and subsidiaries of Overseas Shipholding
Group Inc. All our charters provide for the receipt of a fixed base rate
for the life of the charter, and in the case of 10 of our 12 time charters, also
provide for profit sharing arrangements in excess of the base rate. Please see
“Profit Sharing Arrangements” below for a detailed description of how profit
sharing is calculated.
Business
Strategies
Notwithstanding the current severe
economic downturn the duration and long term effects of which it is
not possible to predict our primary business objective remains to increase
quarterly distributions per unit over time subject to shipping, charter and
financial market developments. In order to achieve this objective we execute the
following business strategies:
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:
Our
Customers
We
provide marine transportation services under medium-to long-term time charters
or bareboat charters with counterparties that we believe are creditworthy.
Currently, our customers are:
BP
Shipping Limited and Morgan Stanley Capital Group Inc. accounted for 54% and 33%
of our revenues respectively for the year ended December 31, 2008. For the year
ended December 31, 2007, these customers accounted for 58% and 24% of our
revenues, respectively and for the year ended December 31, 2006 they accounted
for 42% and 18% of our revenues,
respectively. The loss of any significant customer or a substantial decline in
the amount of services requested by a significant customer could harm our
business, financial condition and results of operations.
Our
Fleet
At the
time of our IPO on April 3, 2007, our fleet consisted of eight vessels. Since
that date, the size of our fleet has greatly increased in terms of both number
of vessels and carrying capacity and currently consists of 18 vessels
comprising:
As of
February 28, 2009, the average age of our fleet was approximately 3.0 years and
the average remaining term under our charters was approximately 4.3
years.
Sister
vessels are vessels of similar specifications and size typically built at the
same shipyard. All of the vessels are or were designed, constructed, inspected
and tested in accordance with the rules and regulations of either Det Norske
Veritas (“DNV”) or the American Bureau of Shipping (“ABS”) and are under
time or bareboat charters commencing at the time of their delivery.
Potential
Additional Vessels from Capital Maritime
We
intend to continue to take advantage of our unique relationship with Capital
Maritime and, subject to prevailing shipping, charter and financial market
conditions and the approval of our board of directors, make strategic
acquisitions in the medium to long term in a prudent manner that is accretive to
our unitholders and to long-term distribution growth. Pursuant to our omnibus
agreement with Capital Maritime, Capital Maritime has granted us a right of
first offer for any MR tankers in its fleet under charter for two or more years
giving us the opportunity to purchase up to an additional six vessels comprised
of two 37,000 dwt Ice Class 1A MR chemical/product tanker sister vessels and
four 51,000 dwt MR IMO II/III chemical/product tanker sister vessels in the
future. Capital Maritime is, however, under no obligation to fix any of these
vessels under charters of two or more years. The vessels are
currently under charter for less than two years or are yet to be chartered as
they are under construction. Please read "Item 7B: Related Party
Transactions" for a detailed description of our omnibus agreement with Capital
Maritime.
In
addition, Capital Maritime currently owns or has on order a number of
modern, double-hull
product and crude oil tankers of different sizes which we may potentially
acquire in the event those vessels were fixed under charters of two or more
years.
The table
below provides summary information as of February 28, 2009 about the vessels in
our fleet and the vessels we may have the opportunity to acquire from Capital
Maritime, as well as their delivery date or expected delivery date to us and
their employment,
including earliest possible redelivery dates of the vessels and the relevant
charter rates. The table also includes the approximate expected termination date
of the management agreement with Capital Ship Management with respect to each
vessel. Sister vessels are denoted by the same letter in the
tables.
OUR
FLEET
__________
Our
Charters
Currently,
all of the vessels in our fleet are under medium to long-term time or bareboat
charters with an average remaining term of approximately 4.3 years as of
February 28, 2009. Under certain circumstances we may operate vessels in the
spot market until the vessels have been fixed under appropriate medium to
long-term charters. Please see “—Our Fleet” above, including the chart and
accompanying notes, for more information on our time and bareboat charters,
including counterparties, expected expiration dates of the charters and daily
charter rates.
Time
Charters
A time
charter is a contract for the use of a vessel for a fixed period of time at a
specified daily rate. Under a time charter, the vessel’s owner provides crewing
and other services related to the vessel’s operation, the cost of which is
included in the daily rate and the charterer is responsible for substantially
all vessel voyage costs except for commissions which are assumed by the owner.
In the case of the vessels under time charter to Morgan Stanley Capital Group
Inc., the charterer is also responsible for the payment of all commissions. The
basic hire rate payable under the charters is a previously agreed daily rate, as
specified in the charter, payable at the beginning of the month in U.S. Dollars.
We currently have 12 vessels under time charter of which five are with Morgan
Stanley Capital Group Inc., five with BP Shipping Limited and one each with
Trafigura Beheer B.V. and Shell International Trading & Shipping Company
Ltd. In August 2008 we reached an agreement with BP Shipping Limited to extend
the time charters for the M/T Agisilaos and the M/T Arionas by 13 months each
and amend the net daily charter rates. Of our 12 time charters, 10 contain
profit-sharing provisions that allow us to realize at a pre-determined
percentage additional revenues when spot rates are higher than the base rates
incorporated in our charters or, in some instances, through greater utilization
of our vessels by our charterers.
Profit
Sharing Arrangements
Morgan Stanley Profit Sharing.
Further to an agreement reached with Morgan Stanley Capital Group Inc. on
July 28, 2008, which took effect
retroactively as of June 1, 2008, the profit sharing arrangements for each
vessel time chartered with Morgan Stanley Capital Group Inc. are calculated
according to the two-step process set out below. Initially, a weighted average
of two indices published daily by the Baltic Exchange based on specific routes
and cargo sizes representative of the vessel’s trading is calculated and settled
quarterly. Specifically, the calculation is based on the performance of the
transatlantic route (TC2) and the Caribbean-US route (TC3) at certain
predetermined weights. If the weighted average time charter equivalent (“TCE”)
is less than or equal to the basic hire rate, then we receive the basic hire
rate only. If the weighted average TCE exceeds the basic hire rate, then we
receive the basic hire rate plus 50% of the excess. In addition, we have the
right to access the charterer's annual results of operations for each vessel,
and, if these show that the vessel has earned more than the calculation above,
we receive 50% of the vessel’s actual profits less any amounts already received
pursuant to the calculation above. If the annual results of
operations for each vessel do not exceed the estimated profit calculation based
on the two routes then no additional payments are made. With the exception of
the profit share arrangement for the M/T Assos, where 1.25% commission is
deducted from the gross profit share amount, no commissions are payable on
revenues derived from our profit shares. Annual results of operations from the
charterer are to be presented by December 31 of each year for the period
commencing December 1 of the previous year to November 30 of the year in
question, with the exception of the fiscal year from December 1, 2007 to
November 30, 2008 for which results of operations were settled semi-annually, in
May and November 2008.
BP Profit Sharing. With the
exception of the M/T Amore Mio II, our profit sharing arrangements for our
vessels time chartered with BP Shipping Limited are based on the calculation of
the TCE according to the “last to next” principle. Actual voyage revenues earned
and received, actual expenses incurred and actual time taken to perform the
voyage are used for the purpose of the calculation. The charterer is obliged to
provide us with a copy of each fixture note and all reasonable documentation
with respect to items of cost and earnings referring to each voyage within every
calculation period, as well as with a statement listing actual voyage results
for voyages completed and estimated results for any voyage not completed at the
time of settlement. When actual revenue and/or expenses have not been settled,
BP Shipping Limited’s estimates apply but remain subject to adjustment upon
closing of actual accounts. If the average daily TCE is less than or equal to
the basic gross hire rate, then we receive the basic net hire rate only. If the
average daily TCE exceeds the basic gross hire rate, then we receive the basic
net hire rate plus 50% of the excess over the gross hire rate. In addition to
the 1.25% commission we pay on the gross charter rate for each vessel, the
relevant ship broker is also entitled to an additional 1.25% commission on the
amount of profit share received from the M/T Agisilaos, the M/T Arionas, the M/T
Axios and the M/T Amore Mio II. In the case of the M/T
Amore Mio II, the calculation of the profit share is based on the weighted
monthly average of two indices published daily by the Baltic Exchange based on
specific routes and cargo sizes representative of the vessel’s trading. The
profit share with BP Shipping Limited is calculated and settled quarterly,
except for the profit share for the M/T Amore Mio II, which is calculated and
settled monthly.
TCE rate
is a shipping industry performance measure used primarily to compare daily
earnings generated by vessels on time charters with daily earnings generated by
vessels on voyage charters, because charter hire rates for vessels on voyage
charters are generally not expressed in per day amounts while charter hire rates
for vessels on time charters generally are expressed in such amounts. TCE is
expressed as per ship per day rate and is calculated as voyage and time charter
revenues less voyage expenses during a period divided by the number of operating
days during the period, which is consistent with industry
standards.
Bareboat
Charters
A
bareboat charter is a contract pursuant to which the vessel owner provides the
vessel to the customer for a fixed period of time at a specified daily rate, and
the customer provides for all of the vessel's expenses (including any
commissions) and generally assumes all risk of operation. In the case of the
vessels under bareboat charter to BP Shipping Limited, we are responsible for
the payment of any commissions. The customer undertakes to maintain
the vessel in a good state of repair and efficient operating condition and
drydock the vessel during this period at its cost and as per the classification
society requirements. The basic rate hire is payable to us monthly in advance in
U.S. Dollars. We currently have six vessels under bareboat charter, three with
BP Shipping Limited and three with subsidiaries of Overseas Shipholding
Group Inc. The charters entered into with subsidiaries of Overseas Shipholding
Group Inc. are fully and unconditionally guaranteed by Overseas Shipholding
Group Inc. and include options for the charterer to purchase each vessel
for $38.0 million, $35.5 million or $33.0 million at the end of
the eighth, ninth or tenth year of the charter, respectively. In each case, the
option to purchase the vessel must be exercised six months prior to the end of
the charter year.
Seasonality
Our
vessels operate under medium to long-term charters and are not generally subject
to the effect of seasonable variations in demand.
Management
of Ship Operations, Administration and Safety
Capital
Maritime provides, through its subsidiary Capital Ship Management, expertise in
various functions critical to our operations. This affords a safe, efficient and
cost-effective operation and, pursuant to a management agreement and an
administrative services agreement we have entered into with Capital Ship
Management, we have access to human resources, financial and other
administrative services, including bookkeeping, audit and accounting services,
administrative and clerical services, banking and financial services, client,
investor relations, information technology and technical management services,
including commercial management of the vessels, vessel maintenance and crewing
(not required for vessels subject to bareboat charters), purchasing, insurance
and shipyard supervision.
Under our time charter
arrangements, Capital Ship Management, our manager, is generally responsible for
commercial, technical, health and safety and other management services
related to the vessels' operation, and the charterer is responsible for port
expenses, canal dues and bunkers and, in the case of the Morgan Stanley Capital
Group Inc. time charters, for commissions. Pursuant to
our management agreement, we pay a fixed daily fee of $5,500 per vessel for our
time chartered vessels ($8,500 for the M/T Amore Mio II), for an initial term of
approximately five years from when we take delivery of each vessel and covers
vessel operating expenses, which include crewing, repairs and maintenance,
insurance and the expenses of the next scheduled special or intermediate survey
for each vessel, as applicable, and related drydocking. Please see the table in
“—Our
Fleet” above
for a list of the approximate expected
termination dates of the management agreement with Capital Ship Management with
respect to each vessel currently in our fleet. Capital Ship Management is
directly responsible for providing all of these items and services. Capital Ship
Management is also entitled to supplementary remuneration for extraordinary fees
and costs of any direct and indirect expenses it reasonably incurs in providing
these services which may vary from time to time, and which includes, amongst
others, certain costs associated with the vetting of our vessels, repairs
related to unforeseen extraordinary events and insurance deductibles. For the
year ended 31, December 2008, such fees amounted to approximately $1.0 million.
Such costs may further increase to reflect unforeseen events and the continuing
inflationary vessel costs environment. The sole expense we incur in connection
with our vessels under bareboat charter is a daily fee of $250 per bareboat
chartered vessel payable to Capital Ship Management, mainly to cover compliance
costs. Capital Ship
Management may provide these services to us directly or it may subcontract for
certain of these services with other entities, including other Capital Maritime
subsidiaries. Going forward, when we
acquire new vessels or when the respective management agreements for our vessels
expire, we will have to enter into new agreements which may provide for
different fees or include different terms. For more information on the
management agreement and administrative services agreements we have with Capital
Ship Management please read “Item 7B: Related Party Transactions—Management
Agreement” and “—Administrative Services Agreement.”
Capital
Ship Management operates under a safety management system in compliance with the
IMO’s ISM code and certified by the American Bureau of Shipping. Capital Ship
Management’s management systems also comply with the quality assurance standard
ISO 9001, the environmental management standard ISO 14001 and the Occupational
Health & Safety Management System (“OHSAS”) 18001, all of which are certified
by Lloyds Register of Shipping. As a result, our vessels’ operations are
conducted in a manner intended to protect the safety and health of Capital Ship
Management's employees, as applicable, the general public and the environment.
Capital Ship Management’s technical management team actively manages the risks
inherent in our business and is committed to eliminating incidents that threaten
safety, such as groundings, fires, collisions and petroleum spills, as well as
reducing emissions and waste generation.
Major
Oil Company Vetting Process
Shipping
in general, and crude oil, refined product and chemical tankers, in particular,
have been, and will remain, heavily regulated. Many international and national
rules, regulations and other requirements – whether imposed by the
classification societies, international statutes (IMO, SOLAS (defined below),
MARPOL, etc.), national and local administrations or industry – must be complied
with in order to enable a shipping company to operate and a vessel to
trade.
Traditionally
there have been relatively few large players in the oil trading business and the
industry is continuously consolidating. The so called “oil majors companies”,
such as ExxonMobil Corporation, BP p.l.c., Royal Dutch Shell plc, Chevron
Corporation, ConocoPhillips, StatoilHydro ASA and Total S.A., together with a
few smaller companies, represent a significant percentage of the production,
trading and, especially, shipping logistics (terminals) of crude and refined
products world-wide. Concerns for the environment, health and safety have led
the oil majors to develop and implement a strict due diligence process when
selecting their commercial partners. This vetting process has evolved into a
sophisticated and comprehensive risk assessment of both the vessel operator and
the vessel.
While a
plethora of parameters are considered and evaluated prior to a commercial
decision, the oil majors, through their association, the Oil Companies
International Marine Forum (“OCIMF”), have developed and are implementing two
basic tools: (i) a Ship Inspection Report Programme (“SIRE”) and (ii) the Tanker
Management & Self Assessment (“TMSA”) Program. The former is a physical ship
inspection based upon a thorough Vessel Inspection Questionnaire (“VIQ”), and
performed by accredited OCIMF inspectors, resulting in a report being logged on
SIRE, while the latter is a recent addition to the risk assessment tools used by
the oil majors.
Based
upon commercial needs, there are three levels of risk assessment used by the oil
majors: (i) terminal use, which will clear a vessel to call at one of the oil
major’s terminals; (ii) voyage charter, which will clear the vessel for a single
voyage; and (iii) term charter, which will clear the vessel for use for an
extended period of time. The depth, complexity and difficulty of each of these
levels of assessment vary. While for the terminal use and voyage charter
relationships a ship inspection and the operator’s TMSA will be sufficient for
the assessment to be undertaken, a term charter relationship also requires a
thorough office assessment. In addition to the commercial interest on the part
of the oil major, an excellent safety and environmental protection record is
necessary to ensure an office assessment is undertaken.
We
believe Capital Maritime and Capital Ship Management are among a small number of
ship management companies to have undergone and successfully completed audits by
six major international oil companies in the last few years (i.e., BP p.l.c.,
Royal Dutch Shell plc, StatoilHydro ASA, Chevron Corporation, ExxonMobil
Corporation and Total S.A).
Crewing
and Staff
Capital
Ship Management, an affiliate of Capital Maritime, through a subsidiary in
Romania and crewing agents in Romania, Russia and the Philippines recruits
senior officers for our vessels. Capital Ship Management also maintains a
presence in the Philippines and Russia and has entered into an agreement for the
training of officers under ice conditions at a specialized training center in
St. Petersburg. Capital Maritime's vessels are currently manned primarily by
Romanian, Russian and Filipino crew members. Having employed these crew
configurations for Capital Maritime for a number of years, Capital Ship
Management has considerable experience in operating vessels in this
configuration and has a pool of certified and experienced crew members which we
can access to recruit crew members for our vessels.
Classification,
Inspection and Maintenance
Every
oceangoing vessel must be “classed” and certified by a classification society.
The classification society is responsible for verifying that the vessel has been
built and maintained in accordance with the rules and regulations of the
classification society and ship’s country of registry as well as the
international conventions of which that country has accepted and signed. In
addition, where surveys are required by international conventions and
corresponding laws and ordinances of a flag state, the classification society
will undertake them on application or by official order, acting on behalf of the
authorities concerned. The classification society also undertakes on request
other surveys and checks that are required by regulations and requirements of
the flag state or port authority. These surveys are subject to agreements made
in each individual case and/or to the regulations of the country
concerned.
For
maintaining the class status, regular and extraordinary surveys of hull and
machinery, including the electrical plant, and any special equipment classed are
required to be performed as follows:
Annual Surveys, which are
conducted for the hull and the machinery at intervals of 12 months.
Intermediate Surveys, which
are extended surveys and are conducted two and one-half years after
commissioning and after each class renewal survey. In the case of newbuildings,
the requirements of the intermediate survey can be met through an underwater
inspection in lieu of drydocking the vessel.
Class Renewal Surveys (also
known as special
surveys) are carried out at the intervals indicated by the classification
for the hull (usually at five year intervals). During the special survey, the
vessel is thoroughly examined, including Non-Destructive Inspections (“NDIs”) to
determine the thickness of the steel structures. Should the thickness be found
to be less than class requirements, the classification society will order steel
renewals. The classification society may grant a one-year grace period for
completion of the special survey. Substantial amounts of funds may have to be
spent for steel renewals to pass a special survey if the vessel experiences
excessive wear and tear. In lieu of the special survey every five years,
depending on whether a grace period is granted, a ship-owner has the option of
arranging with the classification society for the vessel’s hull or machinery to
be on a continuous survey cycle, in which every part of the vessel would be
surveyed within a five-year cycle. At an owner’s application, the surveys
required for class renewal may be split according to an agreed schedule to
extend over the entire period of class. This process is referred to as ESP -
Enhanced Survey Program and CSM - Continuous Machinery Survey.
All areas
subject to survey, as defined by the classification society, are required to be
surveyed at least once per class period, unless shorter intervals between
surveys are prescribed elsewhere.
Most
insurance underwriters make it a condition for insurance coverage that a vessel
be certified as “in class” by a classification society which is a member of the
International Association of Classification Societies. All of our vessels are
certified as being “in class” by ABS, DNV and, in the case of the M/T Attikos
and M/T Aristofanis, China Classification Society. All of the
newbuildings we currently have on order and any other new and secondhand vessels
that we purchase must be certified prior to their delivery. If any vessel we
have contracted to purchase is not certified as “in class” on the date of
closing, we have no obligation to take delivery of the vessel.
Risk
Management and Insurance
The
operation of any ocean-going vessel carries an inherent risk of catastrophic
marine disasters, death or personal injury and property losses caused by adverse
weather conditions, mechanical failures, human error, war, terrorism, piracy and
other circumstances or events. The occurrence of any of these events may result
in loss of revenues or increased costs or, in the case of marine disasters,
catastrophic liabilities. Although we believe our current insurance program is
comprehensive, we cannot insure against all risks, and we cannot be certain that
all covered risks are adequately insured against or that we will be able to
achieve or maintain similar levels of coverage throughout a vessel’s useful
life. Furthermore, there can be no guarantee that any specific claim will be
paid by the insurer or that it will always be possible to obtain insurance
coverage at reasonable rates. More stringent environmental regulations at times
in the past have resulted in increased costs for, and may result in the lack of
availability of, insurance against the risks of environmental damage or
pollution. Moreover, under the terms of our bareboat charters, the charterer
provides for the insurance of the vessel, and as a result, these vessels may not
be adequately insured and/or in some cases may be self-insured. Any uninsured or
under-insured loss could harm our business and financial condition.
We
currently carry “hull and machinery”, “increased value”, “protection and
indemnity” and “war risk” insurance coverage for each of our vessels to protect
against most of the accident-related risks involved in the conduct of our
business:
Not all
risks are insured and not all risks are insurable. The principal insurable risks
which nevertheless remain uninsured across the fleet are “loss of hire” and
“strikes.” We do not insure these risks because the costs are regarded as
disproportionate to the benefit.
The
following table sets forth certain information regarding our insurance coverage
as of December 31, 2008.
The
International Product Tanker Industry
The
international seaborne transportation industry represents the most cost
effective method of transporting large volumes of crude oil and refined
petroleum products. The seaborne movement of refined petroleum products between
regions addresses demand and supply imbalances for such products caused by the
lack of resources or refining capacity in consuming countries. Global demand for
the shipping of refined products and crude oil has grown historically at a
faster rate than the demand for the refined products and the crude oil
themselves. The demand for product and crude oil tankers is cyclical and a
function of several factors, including the general strength of the economy,
location of oil production and the distance from refineries as well as refining
and consumption and world oil demand and supply. According to the Energy
Information Administration (the “EIA”), global oil product demand has been
revised downwards and is expected to decline by 1.6% in 2009 averaging at 84.3
mbd. The EIA expects 2010 oil demand to grow by 1.0% to 85.1 mbd. Due to
increasing environmental restrictions on the building of refineries in the
countries that belong to the Organization for Economic Co-operation and
Development (the “OECD”), additional refineries are expected to continue to be
built at locations far from such points of consumption, resulting in refined
product tankers being required to travel longer distances on each
voyage. The refining industry may respond to the economic
downturn and demand weakness, by reducing or cancelling operating rates and by
reducing plans for certain investment expansion plans, including additional
refining capacity. The worldwide financial and economic downturn may adversely
affect demand for tankers, due to the expected contraction in crude oil and oil
product demand.
Competition
We
operate in a highly fragmented, highly diversified global market with many
charterers, owners and operators of vessels. Competition for charters can be
intense and depends on price as well as on the location, size, age, condition
and acceptability of the vessel and its operator to the charterer and is
frequently tied to having an available vessel which has met the strict
operational and financial standards established by oil majors to pre-qualify or
vet tanker operators prior to entering into charters with them. Although we
believe that at the present time no single company has a dominant position in
the markets in which we compete, that could change and we may face substantial
competition for medium to long-term charters from a number of experienced
companies who may have greater resources or experience than we do when we try to
recharter our vessels. However, we believe the young age of our fleet which is
one of the youngest in the industry, the high specifications of our vessels,
including the ability of most of our vessels to transport refined oil products
and certain chemicals, and the fact that 16 of our 18 charter contracts will
expire on or after January 2010 (the date at which all single-hull tankers
are due to be phased out under IMO regulations) when the number of vessels
available for rehire will have decreased, position us well to recharter our
vessels. In addition, Capital Maritime is among a small number of ship
management companies that has undergone and successfully completed audits by six
major international oil companies in the last few years, including audits with
BP p.l.c., Royal Dutch Shell plc, StatoilHydro ASA, Chevron Corporation,
ExxonMobil Corporation and Total S.A. We believe our ability
to comply with the rigorous and comprehensive standards of major oil companies
relative to less qualified or experienced operators allows us to compete
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