Capital Product Partners
Annual Report 2012

Plain-text annual report

ANNUAL REPORT 2012 Dear Unit Holders, In 2012, we took further steps in securing a more visible, robust growth trajectory over the longer term, while en- suring that we continue to be in a position of financial strength. We remain committed to our annual distribution guidance of $0.93 per common unit. To that end, our commitment remains strong and continuous towards en- hancing our financial flexibility, in pursuing further growth opportunities and forging a pathway to distribu- tion growth, as the underlying product tanker market con- tinues to recover. STRATEGIC DEVELOPMENTS • Fleet Overview: At the time of our IPO, in April 2007, we owned eight newly built Ice Class 1A Medium Range chemical/product tankers, with a total carrying capacity of approximately 327,307 dwt. Today, our fleet sors, Swank Capital, Salient Partners and the Partner- ship's sponsor, Capital Maritime & Trading Corp. (“Capital Maritime”). We utilized the proceeds of this sale, along with our available cash, to proactively pre- pay $149.6 million across the Partnership's three credit facilities. As a result of our prepayment, we deferred all scheduled amortization payments under each of our credit facilities until March 31, 2016. This transaction, along with the resulting amortization deferral, pro- vided our unitholders with clear-cut visibility to the sustainability of our $0.93 per common unit annual distribution guidance. • Entry into the Container Market: We decided to enter into the container market, as we believe the sector contains attractive long-term fundamentals, while the ac- quisition of container vessels with attached long-term Agisilaos Amore Mio II Aias is more diversified, with a total of twenty-seven high specification, modern vessels. It is one of the youngest fleets in the industry, with an average age of approxi- mately 5.7 years (as of 3/31/2013) and total carrying ca- pacity of approximately 1.9 million dwt. Our fleet is comprised of four Suezmax crude oil tankers, eighteen modern MR product tankers, all of which are classed as IMO II/III vessels, four Post-Panamax container vessels and one Capesize bulk carrier. • Class B Unit Issuance & Prepayment of Credit Facilities: In May 2012, we announced the issuance of $140 million of our Class B Convertible Preferred Units to a group of high-quality, long-term investors with a strategic focus on the Master Limited Partner- ship space, including Kayne Anderson Capital Advi- time charters provides longer-term cash flow visibility to our unitholders. As a result, in December 2012, we completed an accretive transaction with Capital Mar- itime through the acquisition of two Post-Panamax con- tainer vessels, with highly attractive charters, to industry leader Maersk Line. As consideration for the acquisition, we contributed our only two VLCC crude oil tankers, the M/T ‘Alexander the Great’ and the M/T ‘Achilleas’, to Capital Maritime. In March 2013, we further expanded our container presence with two 2013 built 5,023 TEU vessels, chartered for 12 years each to Hyundai Merchant Marine Co. Ltd. • Secured Long Term Fleet Employment: We have further enhanced the cash flow visibility of the Part- nership as a result of the container acquisitions noted 1 ANNUAL REPORT 2012 above and the acquisition of a number of other fix- tures throughout 2012. Additionally, as of March 31, 2013, our average remaining charter duration was ap- proximately 7.1 years, with 88% of the fleet total days for the remainder of 2013 secured under period charter coverage, thus enhancing our revenue pre- dictability and strengthening our cash flows. As a number of our product tanker charters expire throughout 2013 and 2014, we expect to benefit from our exposure to the improving fundamentals of the product tanker sector. FINANCIAL REVIEW Revenues from time, voyage and bareboat charters amounted to approximately $154.0 million for the year ended December 31, 2012, as compared to $130.3 mil- lion for the year ended December 31, 2011. Our net loss INDUSTRY OVERVIEW 2012 was a very active year for the product tanker ves- sels market, the market in which two-thirds of our ves- sels operate. The period charter market, in which we focus all our chartering activity, was significantly stronger and at better rates, with an estimated 190 fix- tures for medium range product tankers concluded, compared to 85 fixtures in 2011. Product tanker de- mand increased by 4.2% in 2012, outpacing net fleet growth of 1.3%. The orderbook for new vessels re- mained low at approximately 12%, while the non-de- liveries (slippage) of newbuilding vessels for medium range product tankers were among the highest in the shipping industry, at 57%, as a result of the weak fi- nancing market. The International Energy Agency (“IEA”) oil demand for 2012 amounted to 89.8 mb/day, up 1% compared to 2011. Atrotos Archimidis Apostolos for the year was $21.2 million, compared to a net income of $87.1 million in 2011, as a result of a one-time non- cash impairment charge of $43.2 million in the fourth quarter of 2012. This represented the difference between the carrying values and the fair market values of two VLCCs on the date we sold them to our sponsor, Capital Maritime, in exchange for the acquisition of two Post- Panamax containers with long charters. In 2011 we real- ized a gain from bargain purchase related to two transactions that took place then, including the merger with Crude Carriers, the excess of the fair value of the net assets acquired over the purchase price for both the Crude Carriers’ fleet and the M/V Cape Agamemnon. In 2012, our balance sheet was strong, as the net debt to capitalization stood at 39.2% and Partners’ capital rep- resented 53.6% of our total assets. In the Suezmax tanker market, which is now the only crude oil market exposure in our fleet, 2012 rates re- mained at historically low levels, as decreased U.S. oil import demand out of West Africa dropped and a grow- ing fleet pushed rates modestly lower, as compared to 2011. High slippage of 34% and robust Suezmax demo- lition kept fleet growth in check. Demand for larger container vessels, such as our Post-Pana- max vessels, has increased relative to smaller container ves- sels over the last few years, due to the so-called cascading effect. Liner companies, in an effort to decrease container unit costs and achieve higher economies of scale, have been replacing smaller ships in various routes with larger, energy efficient Post-Panamax vessels, such as our M/V ‘Agamem- non’ and M/V ‘Archimidis’. Increased focus on energy sav- 2 ANNUAL REPORT 2012 ing across the container industry has worked towards re- stricting supply at a time when the container industry is fac- ing a declining orderbook, with slippage running at 34% as a percentage of the container fleet, for the full year of 2012. For 2013, overall demand for product tankers has been revised upwards by industry analysts, to 4.6%, as the mar- ket is expected to improve due to favorable structural changes in the refinery industry, such as U.S. Gulf of Mexico exports and the increased refinery capacity in the Middle East and Asia. This is expected to lead to in- creased long-haul product movements from Asia to the West. On the supply side, net fleet growth for product tankers is forecasted to be in the region of 3.3%. 2013 marks the last year of substantial deliveries in the Suezmax sector, while minimal ordering and high slip- OPERATIONAL EXPERTISE Operationally, we continue to perform at a consistently high level, on par with the expectations set forth by our management and Board of Directors. Our vessels are op- erated under a management agreement with Capital Ship Management Corp. (“CSM”), a subsidiary of our spon- sor, which ensures safe, efficient and cost-effective fleet operation. CSM meets the highest standards in the health, safety and environmental areas and it is one of the few ship management companies to have successfully com- pleted the exhaustive vetting processes of numerous major oil companies and traders. LOOKING AHEAD We believe that the profile of our charters, the age and high specifications of our fleet, our manager’s ability to meet the rigorous vetting requirements of a number of the Miltiadis M II Hyundai Premium Agisilaos page are expected to ease fleet growth. Suezmax tanker deadweight demand for 2013 is projected to grow by 4.3%, while the IEA estimates oil demand for 2013 to 90.6 mb/day, a rise of 0.9% compared to 2012, on the back of rising demand in Asia. Lastly, regarding the container market, global container demand growth is expected to remain quite robust at 5.8% for 2013, which compares to 3.3% for 2012. Capacity growth is expected to be on par with demand for the full year. The relative orderbook stands around historical lows and the current scrapping trend indicates 2013 will ex- ceed the previous record of 381,000 TEU of scrapping set in 2009. The cascading effect is expected to continue, and the supply of large charter-free container vessels remains scarce. world’s major international oil companies and our solid balance sheet, position us well for the future. With these factors in mind, we would like to take this opportunity to reiterate our commitment to our annual distribution guid- ance of $0.93 per common unit going forward and to the continued enhancement of our financial flexibility in order to pursue growth opportunities and forge a pathway to distribution growth. In summary, we look to 2013 with confidence. We would like to take the opportunity to thank you, our unitholders, our employees and clients for your ongoing interest and support. Ioannis E. Lazaridis Chief Executive & Chief Financial Officer June 10, 2013 3 F L E E T O V E RV I E W VESSEL NAME DWT/TEU CHARTERER YEAR/BUILT TYPE OF VESSEL AMORE MIO II AYRTON II AGAMEMNON II ATLANTAS AKTORAS AIOLOS AIAS AMOUREUX AXIOS AVAX APOSTOLOS AKERAIOS AGISILAOS ARIONAS ALKIVIADIS ALEXANDROS II ARISTOTELIS II ARIS II MILTIADIS M II ASSOS ATROTOS ANEMOS I CAPE AGAMEMNON AGAMEMNON ARCHIMIDIS HYUNDAI PREMIUM HYUNDAI PARAMOUNT 159,982 51,260 51,238 36,760 36,759 36,725 150,393 149,993 47,872 47,834 47,782 47,781 36,760 36,725 36,721 51,258 51,226 51,218 162,397 47,872 47,786 47,782 179,221 7,943 7,943 5,023 5,023 2001, S. Korea 2009, S. Korea 2008, S. Korea 2006, S. Korea 2006, S. Korea 2007, S. Korea 2008, Japan 2008, Japan 2007, S. Korea 2007, S. Korea 2007, S. Korea 2007, S. Korea 2006, S. Korea 2006, S. Korea 2006, S. Korea 2008, S. Korea 2008, S. Korea 2008, S. Korea 2006, S. Korea 2006, S. Korea 2007, S. Korea Crude Oil Suezmax IMO II/III Chem./Prod. IMO II/III Chem./Prod. Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Crude Oil Suezmax Crude Oil Suezmax Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product IMO II/III Chem./Prod. IMO II/III Chem./Prod. IMO II/III Chem./Prod. Crude Oil Suezmax Ice Class 1A IMO II/III / Chemical/ Product Ice Class 1A IMO II/III / Chemical/ Product 2007, S. Korea Ice Class 1A IMO II/III / Chemical/ Product 2010, S. Korea 2007, S. Korea 2006, S. Korea 2013, S. Korea 2013, S. Korea Capesize Dry Cargo Container Carrier Container Carrier Container Carrier Container Carrier (cid:2) 27 Vessels - 1.9 Million DWT (cid:2) 5.7 Years Weighted Average Fleet Age (as of March 31, 2013) 4 C H A RT E R C O V E R A G E Total Fleet Days With Secured Charter Coverage in 2013: 88% Average Remaining Charter Duration: 7.1 Years (as of March 31, 2013) 5 ANNUAL REPORT 2012 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM 20-F (Mark One) (cid:2) ⌧ (cid:2) (cid:2) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to OR SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report: 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 and company contact person) _______________________ Ioannis E. Lazaridis, i.lazaridis@capitalpplp.com (Name and Email of company contact person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class Common units representing limited partnership interests Name of each exchange on which registered 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. 69,372,077 Common Units 1,415,757 General Partner Units 15,555,554 Class B Convertible Preferred Units 20-F Filed with the SEC on February 5, 2013 ANNUAL REPORT 2012 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:2) NO ⌧ 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. NO ⌧ YES (cid:2) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securi- ties 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 ⌧ NO (cid:2) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) YES ⌧ NO (cid:2) 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 (cid:2) Accelerated filer ⌧ Non-accelerated filer (cid:2) Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ⌧ International Financial Reporting Standards as issued (cid:2) by the International Accounting Standards Board Other (cid:2) If “Other” has been checked in response to the previous question, indicate by check mark which financial statements item the registrant has elected to follow. ITEM 17 (cid:2) ITEM 18 (cid:2) 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 (cid:2) NO ⌧ ANNUAL REPORT 2012 CAPITAL PRODUCT PARTNERS L.P. TABLE OF CONTENTS Forward-Looking Statements Identity of Directors, Senior Management and Advisors. Offer Statistics and Expected Timetable. Key Information. 6Item 4. Information on the Partnership. Unresolved Staff Comments. Operating and Financial Review and Prospects. Directors, Senior Management and Employees. Major Unitholders and Related-Party Transactions. Financial Information. The Offer and Listing. Additional Information. Quantitative and Qualitative Disclosures About Market Risk. Description of Securities Other than Equity Securities. Defaults, Dividend, Arrearages and Delinquencies. Material Modifications to the Rights of Security Holders and Use of Proceeds. Controls and Procedures. Audit Committee Financial Expert. Code of Ethics. Principal Accountant Fees and Services. Exemptions from the Listing Standards for Audit Committees. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. Change in Registrant’s Certifying Accountant. Corporate Governance. Financial Statements. Financial Statements. Exhibits. PART I Item 1. Item 2. Item 3. Item 4A. Item 5. Item 6. Item 7. Item 8. Item 9. Item 10. Item 11. Item 12. PART II Item 13. Item 14. Item 15. Item 16A. Item 16B. Item 16C. Item 16D. Item 16E. Item 16F. Item 16G. PART III Item 17. Item 18. Item 19. Signatures Page 4 6 6 38 58 58 74 79 86 89 89 98 99 100 100 100 102 102 102 102 102 103 103 104 104 105 107 I ANNUAL REPORT 2012 FORWARD-LOOKING STATEMENTS This annual report on Form 20-F (the “ANNUAL REPORT”) should be read in conjunction with our audited consolidated fi- nancial statements and accompanying notes included herein. Our disclosure and analysis in this Annual Report concerning our business, operations, cash flows, and financial position, including, in particular, the likelihood of our success in developing and expanding our business, include forward-looking statements. In ad- dition, 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”, “project”, “predict”, “propose”, “potential”, “continue” or the negative of these terms or other comparable terminology. Forward-looking statements appear in a number of places in this Annual Report and include statements with respect to, among other things: expectations of our ability to make cash distributions on the common units and the Class B Convertible Preferred Units (the “Class B Units”); global economic outlook and growth; our future financial condition or results of operations and our future revenues and expenses, including revenues from profit sharing arrangements and required levels of reserves; future levels of operating surplus and levels of distributions as well as our future cash distribution policy; shipping conditions and fundamentals, including the balance of supply and demand in the tanker, dry cargo and container markets in which we operate; future charter hire rates and vessel values; anticipated future acquisition of vessels from Capital Maritime & Trading Corp. (“Capital Maritime”) and from third parties; anticipated chartering arrangements with Capital Maritime and third parties in the future; our anticipated growth strategies; our ability to access debt, credit and equity markets; our ability to refinance our debt and/or achieve further postponement of any amortization of our debt if necessary under the current terms of our credit facilities; the ability of our customers to meet their obligations under the terms of our charter agreements, including the timely payment of the rates under the agreements; the financial viability and sustainability of our customers; the outcome of the Overseas Shipholding Group Inc. (“OSG”) bankruptcy proceedings and the actions of OSG and other parties; the repayment of debt and settling of interest rate swaps, if any; the effectiveness of our risk management policies and procedures and the ability of counterparties to our derivative contracts to fulfill their contractual obligations; future refined product and crude oil prices and production; our ability to operate in new markets, including the container carrier market; ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● II ANNUAL REPORT 2012 ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● planned capital expenditures and availability of capital resources to fund capital expenditures; changes in interest rates; changes in the availability and costs of funding due to conditions in the bank market, capital markets and other factors; our ability to maintain long-term relationships with major refined product importers and exporters, major crude oil companies, and major commodity traders; our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term time charter; increases in domestic or worldwide oil consumption; future supply of, and demand for, refined products and crude oil; changes in the supply of tanker vessels, dry cargo and container carrier vessels, including newbuildings, or lower than anticipated scrapping of older vessels; drybulk and container carrier industry trends, including charter rates and factors affecting vessel supply and demand; our ability to leverage to our advantage Capital Maritime’s relationships and reputation in the shipping industry; our continued ability to enter into long-term, fixed-rate time charters with our charterers and to re-charter our vessels as their existing charters expire at attractive rates; our ability to compete successfully for future chartering and newbuilding opportunities; the changes to the regulatory requirements applicable to the oil transportation industry, including, without limitation, requirements adopted by international organizations, such as the International Maritime Organization and the European Union, or by individual countries or charterers and actions taken by regulatory authorities and governing such areas as safety and environmental compliance; the expected cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards, including with new environmental regulations and standards being introduced, as well as with standard regulations imposed by our charterers applicable to our business; our anticipated general and administrative expenses and our costs and expenses under the management agreements and the administrative services agreement with our manager, Capital Ship Management Corp. (“Capital Ship Management”) and for reimbursement for fees and costs of Capital GP L.L.C., our general partner; increases in costs and expenses including but not limited to: crew wages, insurance, provisions, port expenses, lube oil, bunkers, repairs, maintenance and general and administrative expenses; the adequacy of our insurance arrangements and our ability to obtain insurance and required certifications; the impact of the floating fee structure under which certain of our vessels are managed on operating expenses; the ability of our manager to qualify for charter business short- or long-term with oil major charterers; potential increases in costs and expenses under our management agreements following expiration and/or renewal of such agreement in connection with certain of our vessels; the impact of heightened environmental and quality concerns of insurance underwriters and charterers; the impact of heightened regulations and the actions of regulators and other government authorities, including environmental and anti-corruption laws and regulations, as well as sanctions and other governmental actions; the anticipated taxation of our partnership and distributions to our common and Class B unitholders; III ANNUAL REPORT 2012 ● ● ● ● ● ● ● ● ● ● estimated future maintenance and replacement capital expenditures; expected demand in the shipping sectors in which we operate in general and the demand for our crude oil and medium range vessels in particular; the expected lifespan of our vessels; our ability to employ and retain key employees; the effects of increasing emphasis on environmental and safety concerns by customers, governments and others; expected financial flexibility to pursue acquisitions and other expansion opportunities; anticipated funds for liquidity needs and the sufficiency of cash flows; our ability to increase our distributions over time; future sales of our units in the public market; and our business strategy and other plans and objectives for future operations. 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” below. The risks, uncertainties and assumptions involve known and unknown risks and are inher- ently subject to significant uncertainties and contingencies, many of which are beyond our control. We caution that forward-look- ing statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward- looking statements. Unless required by law, we expressly disclaim any 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 fac- tors 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 ma- terially different from those contained in any forward-looking statement. You should carefully review and consider the various dis- closures included in this Annual Report and in our other filings made with the U.S. Securities and Exchange Commission (the “SEC”) that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations. IV ANNUAL REPORT 2012 PART I _______________________ Item 1. Identity of Directors, Senior Management and Advisors. Not Applicable. Item 2. Offer Statistics and Expected Timetable. Not Applicable. Item 3. Key Information. A. Selected Financial Data We have derived the following selected historical financial and other data for the three years ended December 31, 2012, from our au- dited consolidated financial statements as of and for the years ended December 31, 2012, 2011 and for the year ended December 31, 2010 (the “Financial Statements”) respectively, appearing elsewhere in this Annual Report. The historical financial data presented as of December 31, 2010, 2009 and 2008 and for the years ended December 31, 2009 and 2008 have been derived from audited financial state- ments not included in this Annual Report and are provided for comparison purposes only. Our historical results are not necessarily in- dicative of the results that may be expected in the future. Different factors affect our results of operations, including amongst others, the number of vessels in our fleet, prevailing charter rates, management and administrative services fees as well as financing and interest swap arrangements we enter into. Consequently, the below table should be read together with, and is qualified in its entirety by refer- ence to, the Financial Statements and the accompanying notes included elsewhere in this Annual Report. The table should also be read together with “Item 5A:—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 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. Dol- lars, except numbers of units and earnings per unit. 5 ANNUAL REPORT 2012 Income Statement Data: Revenues Revenues – related party Total revenues Expenses: Voyage expenses (2) Voyage expenses – related party (2) Vessel operating expenses – related party (3) Vessel operating expenses (3) General and administrative expenses Gain on sale of vessels to third parties Depreciation Vessels’ impairment charge Total operating expenses Operating income Gain from bargain purchase Interest expense and finance costs Gain on interest rate swap agreement Interest and other income Foreign currency gain/(loss), net Net (loss) / income Less: Net income attributable to CMTC operations: Partnership’s net (loss) / income Class B unit holders’interest in our net (loss) / income General partner’s interest in our net (loss) / income Limited and subordinated unit holders’ interest in our net (loss) / income Net (loss) / income allocable to limited partner per (4) : Common unit (basic and diluted) Subordinated unit (basic and diluted) Total unit (basic and diluted) Weighted–average units outstanding (basic and diluted): Common units Subordinated units Total units 2012 $84,012 69,938 153,950 5,114 554 23,634 22,126 9,159 (1,296) 48,235 43,178 150,704 3,246 - (26,658) 1,448 775 – $(21,189) – (21,189) 10,809 (640) (31,358) (0.46) – (0.46) Year ended December 31, 2010 (1) $113,562 11,030 124,592 2011 $98,517 31,799 130,316 2009 (1) $134,519 – 134,519 11,565 165 30,516 4,949 10,609 - 37,214 - 95,018 35,298 82,453 (33,820) 2,310 879 – $87,120 – 87,120 - 1,742 85,378 1.78 – 1.78 7,009 - 30,261 1,034 3,506 - 31,464 - 73,274 51,318 – (33,259) – 860 – $18,919 983 17,936 - 359 17,577 0.54 – 0.54 3,993 - 30,830 2,204 2,876 - 30,685 - 70,588 63,931 – (32,675) – 1,460 – $32,716 3,491 29,225 - 584 28,641 1.15 1.17 1.15 2008 (1) $147,617 – 147,617 5,981 - 26,193 5,682 2,817 - 26,581 - 67,254 80,363 – (26,631 – 1,254 – $54,986 4,219 50,767 - 13,485 37,282 1.56 1.50 1.54 68,256,072 – 68,256,072 47,138,336 – 47,138,336 32,437,314 – 32,437,314 23,755,663 1,061,488 24,817,151 15,379,212 8,805,522 24,184,734 $959,550 1,070,128 Balance Sheet Data (at end of period): Vessels, net and under construction (10) (11) Total assets Total partners’ capital / stockholders’ equity (6)(7) (8) (9) Number of units Common units Class B units Subordinated units (5) General Partner units Dividends declared per common andsubordinated unit Dividends declared per class B unit Cash Flow Data: Net cash provided by operating activities 84,798 Net cash provided by / (used in) investing activities 15,935 Net cash (used in) / provided by financing activities (110,552) 573,828 86,343,388 69,372,077 15,555,554 – 1,415,757 0.93 0.48 6 $1,073,986 1,196,289 517,326 70,787,834 69,372,077 – – 1,415,757 $0.93 – 56,539 (16,656) (18,984) $707,339 758,252 $703,707 760,928 239,760 38,720,594 37,946,183 – – 774,411 $1.09 – 50,051 (79,202) 58,070 188,352 25,323,623 24,817,151 – – 506,472 $2.27 – 72,562 (55,770) (56,389) $750,815 821,907 214,126 25,323,623 16,011,629 – 8,805,522 506,472 $1.62 – 76,956 (270,003) 216,277 ANNUAL REPORT 2012 (1) (2) (3) (4) (5) (6) (7) (8) (9) The results of operations for the vessels set out below are included in our income statements for the periods prior to their acqui- sitions by us, as described below, as these vessels were acquired from an entity under common control. However, such earnings for the periods prior to their acquisitions were not allocated to our unitholders and were not included in the cash available for distribution calculation. Specifically, we refer to the amount of historical earnings per unit for: a) the period from January 1, 2008 to March 26, 2008 and April 29, 2008 for the M/T Amore Mio II and the M/T Aristofanis, re- spectively, b) the year ended December 31, 2008 and the period from January 1, 2009 to April 6, 2009 and April 12, 2009 for the M/T Agamem- non II, and M/T Ayrton II respectively, c) the years ended December 31, 2008 and 2009 and for the period from January 1, 2010 to June 29, 2010 for the M/T Alkiviadis, and d) the period from April 13, 2009 to December 31, 2009 and from January 1, 2010 to February 28, 2010 for the M/T Atrotos. Vessel voyage expenses primarily consist of commissions, port expenses, canal dues and bunkers. Our vessel operating expenses have consisted of management fees payable to Capital Ship Management, our manager, pursuant to the terms of our three separate management agreements and actual operating expenses such as crewing, repairs and mainte- nance, insurance, stores, spares, lubricants and other operating expenses incurred by our vessels. On January 1, 2009, we adopted accounting guidance newly available at the time relating to the Application of the Two-Class Method and its application to Master Limited Partnerships which considers whether the incentive distributions of a master lim- ited partnership represent a participating security when considered in the calculation of earnings per unit under the Two-Class Method. This guidance also considers whether the partnership agreement contains any contractual limitations concerning distri- butions to the incentive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. According to the two class method, the portion of net income allocated to nonvested shares reduces the net income available to common unitholders. Following the early termination of the subordination period on February 14, 2009, all of our 8,805,522 subordinated units con- verted into common units on a one-for-one basis. In February and August 2010, we completed two equity offerings of 6,281,578 and 6,052,254 common units, which include the partial exercise of the underwriters’ overallotment option of 481,578 and 552,254 common units, respectively. During the same periods we issued, in exchange for cash, 128,195 and 123,515 general partner units, respectively, to our general partner in order for it to maintain its 2% interest in us. On August 31, 2010, we issued, either directly or through our general partner, 795,200 restricted units to the members of our board of directors, to all employees of our general partner, our manager, Capital Maritime and certain key affiliates and other eligible persons. Please read “Item 6E: Share Ownership-Omnibus Incentive Compensation Plan” and Note 14 (Omnibus Incentive Com- pensation Plan) to our Financial Statements included herein for additional information. On June 9, 2011, we completed the acquisition of Patroklos Marine Corp., the vessel owning company of the M/V Cape Agamem- non, from Capital Maritime. The acquisition was funded through $1.5 million from available cash and the incurrence of $25.0 million of debt under a new credit facility and the remainder through the issuance of 6,958,000 common units to Capital Mar- itime. On September 30, 2011 we completed a merger with Crude Carriers Corp., a company incorporated in 2009 under the laws of the Marshall Islands, (“Crude Carriers” or “Crude”) in a unit-for-share transaction. The exchange ratio was 1.56 of our com- mon units for each Crude Carriers share. In accordance with certain subscription agreements entered into on May 11 and June 6, 2012, we issued a total of 15,555,554 Class B units to a group of investors including Capital Maritime and received net proceeds of $136.4 million, which, together with an amount of $13.2 million from our available cash, were used to prepay bank debt of $149.6 million. (10) During the first half of 2012, we sold the M/T Attikos and the M/T Aristofanis, the two small tankers in our fleet, to unrelated third parties. The proceeds from these sales plus cash were used to repay bank debt of $20.5 million. (11) On December 22, 2012, we acquired all of Capital Maritime’s interest in its wholly owned subsidiaries that owned the two 7,943 TEU container carrier vessels M/V Archimidis and M/V Agamemnon, in exchange for all of our interest in our wholly owned subsidiaries that owned the two Very Large Crude Carriers (“VLCC”) M/T Alexander the Great and M/T Achilleas. Capital Mar- itime paid a total net consideration of $0.3 million in connection with this transaction and has waived any compensation for the early termination of the charters of the two VLCCs. In view of this transaction we repaid $5.2 million in debt. As a consequence of this exchange we recognized an impairment charge of $43.2 million in our consolidated statements of comprehensive (loss) / income which was the result of the difference between the carrying and the fair market value of the M/T Alexander the Great and M/T Achilleas on the date of the exchange. Please read “Item 4A: History and Development of the Partnership-2012 Developments-and Note 3 (Acquisitions), Note 5 (Ves- sels), Note 7 (Long Term Debt), and Note 13 (Partners’ Capital/Stockholders’ Equity) to our Financial Statements included herein for additional information. 7 ANNUAL REPORT 2012 B. Capitalization and Indebtedness. Not applicable. C. Reasons for the Offer and Use of Proceeds. Not applicable. D. Risk Factors An investment in our securities involves a high degree of risk. Some of the following risks relate principally to the countries and the in- dustry in which we operate and the nature of our business in general. Although many of our business risks are comparable to those of a cor- poration engaged in a similar business would face, limited partner interests are inherently different from the capital stock of a corporation. 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 RELATING TO THE TANKER INDUSTRY Global economic conditions may have a material adverse effect on our ability to pay distributions as well as on our business, financial position, distributions and results of operations, and, along with changes in the oil markets, could result in decreased demand for our ves- sels and services and could materially affect our ability to recharter our vessels at favorable rates. Oil has been one of the world’s primary energy sources for a number of decades. The global economic growth of previous years had a significant impact on the demand for oil and subsequently on the oil trade and shipping demand. However, the past four years were marked by a major economic slowdown which has had, and continues to have, a significant impact on world trade, including the oil trade. Global economic conditions remain fragile with significant uncertainty remaining with respect to recovery prospects, levels of recovery and long- term economic growth effects. In particular, the uncertainty surrounding the future of the Euro zone, the economic prospects of the United States and the future economic growth of China, Brazil, Russia, India and other emerging markets are all expected to affect demand for prod- uct and crude tankers going forward. Demand for oil and refined petroleum products remains weak as a result of the global economic slow- down, which in combination with the diminished availability of trade credit, deteriorating international liquidity conditions and declining fi- nancial markets, led to decreased demand for tanker vessels, creating downward pressure on charter rates. This economic downturn has also affected vessel values overall. Despite global oil demand growth remaining marginally positive for 2011 and 2012, charter rates for product and crude tankers remained, and continue to be, at historically depressed levels. Continuing positive oil demand growth is expected to come primarily from emerging markets which have been historically volatile, such as China and India, and a slowdown in these countries’economies may severely affect global oil demand growth, and may result in protracted, reduced consumption of oil products and a decreased demand for our vessels and lower charter rates, which could have a material adverse effect on our business, results of operations, cash flows, finan- cial condition and ability to make cash distributions. If these global economic conditions persist we may not be able to operate our vessels profitably or employ our vessels at favorable char- ter rates as they come up for rechartering. In the long term, oil demand may also be reduced by an increased reliance on alternative energy sources and/or a drive for increased efficiency in the use of oil as a result of environmental concerns or high oil prices. Furthermore, a sig- nificant decrease in the market value of our vessels may cause us to recognize losses if any of our vessels are sold or if their values are im- paired, and may affect our ability to comply with our loan covenants. A deterioration of the current economic and market conditions or a neg- ative change in global economic conditions or the product or crude tanker markets would be expected to have a material adverse effect on our business, financial position, results of operations and ability to make cash distributions and comply with our loan covenants, as well as our future prospects and ability to grow our fleet. Charter rates for tanker vessels are highly volatile and are currently near historically low levels and may further decrease in the future, which may adversely affect our earnings and our ability to make cash distributions as we may not be able to recharter our vessels, or we may not be able to recharter them at competitive rates. The shipping industry is cyclical, which may result in volatility in charter hire rates and vessel values. We may not be able to success- fully charter our vessels in the future or renew existing charters at the same or similar rates. Charter hires are currently near historically low levels and may further decrease in the future, which may adversely affect our earnings as we may not be able to recharter our vessels for pe- riod charters at competitive rates or at all. We are particularly exposed to the fundamentals of the product and crude tanker markets as the majority of the vessels in our fleet are tankers and all the period charters scheduled to expire over the next twelve month period relate to tanker vessels. We may only be able to recharter these vessels at reduced or unprofitable rates as their current charters expire, or we may not be able 8 ANNUAL REPORT 2012 to recharter these vessels at all. In the event the current low rate environment continues and charterers do not display an increased interest in chartering vessels for longer periods at improved rates, we may not be able to obtain competitive rates for our vessels and our earnings and distributions may be adversely affected. 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 termi- nate 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 unithold- ers could be adversely affected. Alternatively, we may have to deploy these vessels in the spot market, which, although common in the tanker industry, is cyclical and highly volatile, with rates fluctuating significantly based upon demand for oil and oil products and tanker supply, amongst others. In the past, the spot market has also experienced periods when spot rates have declined below the operating cost of vessels and currently charter rates in the spot market are also close to historical lows. The successful operation of our vessels in the spot market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. Furthermore, as charter rates for spot charters are fixed for a single voyage which may last up to several weeks, during peri- ods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases. The demand for period charters may not increase and the tanker charter market may not significantly recover over the next several months or may decline further. The occurrence of any of these events could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to meet our obligations and to make cash distributions. 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 outside of our control, including: • • • • • • • • • the supply for oil and oil products which is influenced by, amongst others: • international economic activity; • geographic changes in oil production, processing and consumption; • oil price levels; • inventory policies of the major oil and oil trading companies; • competition from alternative sources of energy; and • strategic inventory policies of countries such as the United States, China and India. the demand for oil and oil products; regional availability of refining capacity; prevailing economic conditions in the market in which the vessel trades; availability of credit to charterers and traders in order to finance expenses associated with the relevant trades; regulatory change; lower levels of demand for the seaborne transportation of refined products and crude oil; increases in the supply of vessel capacity; and the cost of retrofitting or modifying existing ships, as a result of technological advances in vessel design or equipment, changes in ap- plicable environmental or other regulations or standards, or otherwise. The market value of vessels is influenced by the ability of buyers to access bank finance and equity capital and any disruptions to the mar- ket and the possible lack of adequate available finance may negatively affect such market values. If we sell a vessel at a time when the mar- ket 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 exist- ing credit facilities and/or limit our ability to obtain additional financing. Increasing self-sufficiency in energy by the United States could lead to a decrease in imports of oil to that country, which to date has been one of the largest importers of oil worldwide. The United States is expected to overtake Saudi Arabia as the world’s top oil producer by 2017, according to an annual long-term report by the International Energy Agency (“IEA”). The steep rise in shale oil and gas production is expected to push the country toward self-suf- ficiency in energy. According to the IEA report a continued fall in U.S. oil imports is expected with North America becoming a net oil ex- porter by around 2030. In recent years the share of total U.S. consumption met by total liquid fuel net imports, including both crude oil and products, has been decreasing since peaking at over 60% in 2005 and is expected to fall at around 39% in 2013 as a result of lower consumption and the substantial increase in domestic crude oil production. A slowdown in oil imports to the United States, one of the most important oil trading nations worldwide, may result in decreased demand for our vessels and lower charter rates, which could have a material adverse ef- fect on our business, results of operations, cash flows, financial condition and ability to make cash distributions. 9 ANNUAL REPORT 2012 An oversupply of tanker vessel capacity may lead to reductions in charter hire rates, vessel values and profitability. The market supply of tankers is affected by a number of factors such as demand for energy resources and primarily oil and petroleum prod- ucts, level of charter hire rates, asset and newbuilding prices, availability of financing as well as overall economic growth in parts of the world economy, including Asia, and has been increasing as a result of the delivery of substantial newbuilding orders over the last few years. New- buildings, especially for crude vessels, were delivered in significant numbers starting at the beginning of 2006 and continued to be delivered in significant numbers through to 2011 and 2012. In addition, it is estimated by Clarkson Research Services Limited that the newbuilding or- der book, which extends to 2015 equals approximately 11.8% of the existing world tanker fleet and the order book may increase further in pro- portion to the existing fleet. If the capacity of new ships delivered exceeds the capacity of tankers being scrapped and lost, tanker capacity will increase. If the supply of tanker capacity increases and if the demand for tanker capacity does not increase correspondingly, charter rates and vessel values could materially decline. If such a reduction occurs, we may only be able to recharter our vessels at reduced or unprofitable rates as their current charters expire, or we may not be able to charter these vessels at all. A reduction in charter rates and the value of our vessels may have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to make cash distributions. A number of third party owners have ordered so-called “eco type” vessel designs, which offer substantial bunkers savings as compared to older designs. Increased demand for and supply of ‘eco-type’ vessels could reduce demand for our vessels and expose us to lower ves- sel utilization and/or decreased charter rates. The product tanker newbuilding order book as of December 2012 is estimated at 215 vessels or 11.6% of the current product tanker fleet according to Clarksons Research Services Limited. The majority of these orders are based on new vessel designs, which purport to offer be- tween 15-30% in bunker savings compared to older designs, which include our vessels. Such savings could result in a substantial reduction of bunker cost for charterers compared to our vessels. As the supply of such “eco type” vessel increases and if charterers prefer such vessels over our vessels, this may reduce demand for our vessels, impair our ability to recharter our vessels at competitive rates and have a material adverse effect on our cash flows and operations. RISKS INHERENT IN THE DRYBULK TRADE We are exposed to various risks in the international drybulk shipping industry, which is cyclical and volatile. Following our acquisition of the M/V Cape Agamemnon from Capital Maritime on June 10, 2011, we became subject to various risks of the drybulk shipping industry. The drybulk shipping industry is cyclical with attendant volatility in charter rates, vessel values and profitability. In addition, the degree of charter hire rate volatility among different types of drybulk carriers has varied widely. After reaching historical highs in mid-2008, charter hire rates for Capesize drybulk carriers such as the M/V Cape Agamemnon have been decreasing and are currently at or, near historical low levels. The M/V Cape Agamemnon is currently deployed on a period time charter. In the future we may have to char- ter it pursuant to short-term time charters, and may be exposed to changes in spot market and short-term charter rates for drybulk carriers, and such changes may affect our earnings and the value of the M/V Cape Agamemnon at any given time. Moreover, the factors affecting the supply and demand for drybulk vessels are outside of our control and are difficult to predict with con- fidence. As a result, the nature, timing, direction and degree of changes in industry conditions are also unpredictable. Factors that influence demand for vessel capacity include among others: • • • • • demand for and production of drybulk products; global and regional economic and political conditions; environmental and other regulatory developments; the distance drybulk cargoes are to be moved by sea; and changes in seaborne and other transportation patterns. Factors that influence the supply of vessel capacity include: • • • • • the number of newbuild deliveries, which among other factors relates to the ability of shipyards to deliver newbuilds by contracted delivery dates and the ability of purchasers to finance such newbuilds; the scrapping rate of older vessels; port and canal congestion; the number of vessels that are in or out of service, including due to vessel casualties; and changes in environmental and other regulations that may limit the useful lives of vessels. 10 ANNUAL REPORT 2012 We currently anticipate that the future demand for the M/V Cape Agamemnon following completion of its charter and, in turn, drybulk charter rates, will be dependent, among other things, upon economic growth in the global economy including the world’s developing economies such as China, India, Brazil and Russia, seasonal and regional changes in demand, changes in the capacity of the global drybulk vessel fleet and the sources and supply of drybulk cargo to be transported by sea. A decline in demand for commodities transported in drybulk vessels or an increase in supply of drybulk vessels could cause a significant decline in charter rates, which could materially adversely affect our busi- ness, financial condition and results of operations. The M/V Cape Agamemnon is currently chartered at rates that are at a substantial premium to the spot and period market, and the loss of this charter could result in a significant loss of expected future revenues and cash flows. The M/V Cape Agamemnon is currently under a 10 year time charter to Cosco Bulk Carrier Co. Ltd. (“Cosco”), an affiliate of the Chi- na Ocean Shipping (Group) Company (“COSCO Group”) and one of the largest drybulk charterers globally, which commenced in July 2010 and was amended in November 2011. The earliest expiry under the charter is June 2020. Since the charter amendment in November 2011, the gross charter rate is a flat rate of $42,200 per day. Cosco has faced financial difficulties and has incurred losses recently. The loss of this customer could result in a significant loss of rev- enues, cash flow and our ability to maintain or improve distributions longer term. We could lose this customer or the benefits of the charter entered into with it if, among other things: • • • • • • • • the customer is unable or unwilling to perform its obligations under the charter, including the payment of the agreed rates in a time- ly manner; the customer continues to face financial difficulties forcing it to declare bankruptcy or to default under the charter; the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise; the customer seeks to re-negotiate the terms of the charter agreement due to prevailing economic and market conditions or due to con- tinued poor performance by the charterer; the customer exercises certain rights to terminate the charter; the customer terminates the charter because we fail to comply with the terms of the charter, the vessel is lost or damaged beyond re- pair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the charter; a prolonged force majeure event affecting the customer, including war or political unrest prevents us from performing services for that customer; or the customer terminates the charter because we fail to comply with the safety and regulatory criteria of the charterer or the rules and regulations of various maritime organizations and bodies. In the event we lose the benefit of the charter with Cosco prior to its expiration date, we would have to recharter the vessel at the then prevailing charter rates. In such event, we may not be able to obtain competitive, or profitable, rates for this vessel and our earnings and abil- ity to make cash distributions may be adversely affected. A negative change in the economic conditions in the United States, the European Union or the Asian region, especially in China, Japan or India, could reduce drybulk trade and demand, which could reduce charter rates and have a material adverse effect on our business, financial condition and results of operations. A significant number of the port calls made by capesize bulk carriers involve the loading or discharging of raw materials in ports in the Asian region, particularly China, Japan and India. As a result, a negative change in economic conditions in any Asian country, particularly China, Japan or India, could have a material adverse effect on our business, financial position and results of operations, as well as our future prospects, by reducing demand and, as a result, charter rates and affecting our ability to re-charter the M/V Cape Agamemnon at a profitable rate. In past years, China and India have had two of the world’s fastest growing economies in terms of gross domestic product and have been the main driving force behind increases in marine drybulk trade and the demand for drybulk vessels. If economic growth declines in China, Japan, India and other countries in the Asian region, we may face decreases in such drybulk trade and demand. Moreover, a slowdown in the United States and Japanese economies, as has occurred recently, or the economies of the European Union or certain Asian countries will like- ly adversely affect economic growth in China, India and elsewhere. Such an economic downturn in any of these countries could have a ma- terial adverse effect on our business, financial condition and results of operations. An oversupply of drybulk vessel capacity may lead to reductions in charter hire rates, vessel values and profitability. The market supply of drybulk vessels has been increasing, and the number of drybulk vessels on order as of December 31, 2012, was es- timated by market sources to be approximately 20.1% of the then-existing global drybulk fleet in terms of dwt, with deliveries expected main- ly during the succeeding 24 months, although available data with regard to cancellations of existing newbuild orders or delays of newbuild deliveries are not always accurate. 11 ANNUAL REPORT 2012 Despite increased demolition of older drybulk vessels in 2011, the drybulk fleet continues to grow at a rapid pace. An oversupply of dry- bulk vessel capacity will likely result in a reduction of charter hire rates. Upon the expiration of its current period time charter in June 2020, if we cannot enter into a new period time charter for the M/V Cape Agamemnon on acceptable terms, we may have to secure charters in the spot market, where charter rates are more volatile and revenues are, therefore, less predictable, or we may not be able to charter the vessel at all. The international drybulk shipping industry is highly competitive, and as a new entrant in this industry with only one drybulk vessel in its fleet, we may not be able to compete successfully for charters with established companies or other new entrants with greater resources, and we may not be able to successfully operate the vessel. We have historically owned tanker vessels and have been active in the tanker market only. We employ the M/V Cape Agamemnon in the highly competitive drybulk market in which we have no prior experience. The drybulk market is capital intensive and highly fragmented. Com- petition arises primarily from other vessel owners, some of which have substantially greater resources than we have or will have. Competi- tion for the transportation of drybulk cargo by sea is intense and depends on price, customer relationships, operating expertise, professional reputation and size, age, location and condition of the vessel. In this highly fragmented market, established companies operating larger fleets as well as additional competitors with greater resources may be able to offer lower charter rates than we are able to offer, which could have a material adverse effect on our ability to utilize the M/V Cape Agamemnon and, accordingly, its profitability. The operation of drybulk vessels has certain unique operational risks, and failure to adequately maintain the M/V Cape Agamemnon could have a material adverse effect on our business, financial condition and results of operations. The M/V Cape Agamemnon is the only drybulk vessel in our fleet. With a drybulk vessel, the cargo itself and its interaction with the ves- sel may create operational risks. By their nature, drybulk cargoes are often heavy, dense and easily shifted, and they may react badly to wa- ter exposure. In addition, drybulk vessels are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treat- ment during unloading procedures may be more susceptible to breach while at sea. Breaches of a drybulk vessel’s hull may lead to the flood- ing of the vessel’s holds. If a drybulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel. If we or Capital Maritime, as manager, do not adequately main- tain the M/V Cape Agamemnon, we may be unable to prevent these events. The occurrence of any of these events could have a material ad- verse effect on our business, financial condition and results of operations. RISKS RELATING TO THE CONTAINER CARRIER TRADE We are exposed to various risks in the ocean going container shipping industry, which is cyclical and volatile in terms of charter rates and profitability. With the exception of the M/V Cape Agamemnon, we have historically owned tanker vessels and have been active in the tanker market only. We employ the M/VArchimidis and M/VAgamemnon in the container shipping market in which we have no prior experience. The ocean- going container shipping industry is both cyclical and volatile in terms of charter rates and profitability and demand for our vessels depends on demand for the shipment of cargoes in containers and, in turn, containerships. Containership charter rates peaked in 2005 but have declined sharply and have remained low throughout 2012, as the impact of the European sovereign debt crisis and economic slowdown across the globe have affected international trade including exports from China to Europe and the United States, and have been subject to downward fluctu- ations which in many cases have resulted in historical lows. Liner companies have experienced a substantial drop-off in container shipping activity, resulting in decreased average freight rates since the second half of 2011, and the continuation of such decreased freight rates or any further declines in freight rates would negatively affect the liner companies to which we charter our containerships. Variations in container- ship charter rates result from changes in the supply and demand for ship capacity and changes in the supply and demand for the major prod- ucts transported by containerships. The economics of the container business have also been affected negatively by the large number of con- tainership newbuild vessels ordered prior to the onset of the downturn. Accordingly, weak conditions in the containership sector may affect our ability to generate cash flows and maintain liquidity, as well as adversely affect our ability to obtain financing. The factors affecting the supply and demand for containerships are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable and include supply and demand for products shipped in containers, changes in global production of products transported by containerships, global and regional economic and political conditions, developments in international trade, environ- mental and other regulatory developments, the distance container cargo products are to be moved by sea, changes in seaborne and other trans- portation patterns, port and canal congestion and currency exchange rates, number and price of newbuilding deliveries, availability of ship- yard capacity and scrapping rate of older vessels as well as the overall number of containerships that are out of service. 12 ANNUAL REPORT 2012 Consumer confidence and consumer spending remain relatively weak and uncertain. Consumer purchases of discretionary items, many of which are transported by sea in containers, generally decline during periods where disposable income is adversely affected or there is eco- nomic uncertainty and, as a result, liner company customers may ship fewer containers or may ship containers only at reduced rates. Any such decrease in shipping volume could adversely impact liner companies and increasing the counterparty risk associated with the charters for our vessels and, in turn, affect overall demand for containerships. Our ability to re-charter our containerships upon the expiration or termination of their current time charters and the charter rates payable under any renewal options or replacement time charters will depend upon, among other things, the prevailing state of the containership char- ter market, which can be affected by consumer demand for products shipped in containers. If the charter market is depressed when our con- tainerships’ time charters expire, we may be forced to re-charter our containerships at reduced or even unprofitable rates, or we may not be able to re-charter them at all, which may reduce or eliminate our earnings or make our earnings volatile. The same issues will be faced if we acquire additional vessels and attempt to obtain multi-year time charters as part of our acquisition and financing plan. The decline in the containership market has affected the major liner companies and the value of container vessels, which follow the trends of freight rates and containership charter rates, and can affect the earnings on our charters, and similarly, our cash flows and liquidity. The decline in the containership charter market has had and may continue to have additional adverse consequences for the container industry in- cluding, a less active secondhand market for the sale of vessels, charterers not performing under, or requesting modifications of, existing time charters. A further downturn in the container shipping industry could adversely affect our ability to pay distributions to our unitholders and affect our results of operations and financial condition. An oversupply of containership capacity may prolong or further depress the current charter rates and adversely affect our ability to re- charter our existing containerships at profitable rates or at all. From 2005 through the first quarter of 2010, the size of the containership order-book was at historically high levels. Although order-book volume dropped during 2011 to relatively low levels compared to previous years, the order-book is still at above 20% of the existing fleet and deliveries of vessels ordered will significantly increase the size of the container fleet over the next two years. Additionally, a substantial number of container vessels are currently idle and the potential reactivation of the idle fleet may result in a prolonged period of lower char- ter rates or in a reduction of charter rates. An oversupply of newbuilding vessels and/or re-chartered or idle containership capacity entering the market, combined with any future decline in the demand for containerships, may result in a reduction of charter rates and may decrease our ability to re-charter our containerships other than for reduced rates or unprofitable rates, or we may not be able to re-charter our contain- erships at all. We are dependent on our charterer fulfilling its obligations under its agreements with us, and its inability or unwillingness to honor these obligations could reduce our revenues and cash flow. Our two container carrier vessels are currently under charters with A.P. Moller-Maersk A.S (“Maersk Line”). We expect that our two con- tainerships will continue to be chartered to customers mainly under multi-year fixed rate time charters. Many liner companies, including our charterer, finance their activities through cash from operations, the incurrence of debt or the issuance of equity. Since 2008, there has been a significant decline in the credit markets and the availability of credit, and the equity markets have been volatile. The combination of a reduction of cash flow resulting from declines in world trade, a reduction in borrowing bases under reserve-based credit facilities and the lack of avail- ability of debt or equity financing may result in a significant reduction in the ability of our charterers to make charter payments to us. If we lose a time charter because the charterer is unable to pay us or for any other reason, we may be unable to re-deploy the related vessel on sim- ilarly favorable terms or at all. Also, we will not receive any revenues from such a vessel while it is un-chartered, but we will be required to pay expenses necessary to maintain and insure the vessel and service any indebtedness on it. The combination of any surplus of container- ship capacity and the expected increase in the size of the world containership fleet over the next few years may make it difficult to secure substitute employment for any of our containerships if our counterparties fail to perform their obligations under the currently arranged time charters, and any new charter arrangements we are able to secure may be at lower rates. Furthermore, the surplus of containerships available at lower charter rates and lack of demand for our customers’ liner services could negatively affect our charterers’ willingness to perform their obligations under our time charters, which in many cases provide for charter rates significantly above current market rates. A failure of Maer- sk Line to comply with the terms of its charters, and our inability to replace such charters in a certain manner may, under certain circumstances, result in an event of default under our credit facilities. The loss of either of our charterers or vessels, or a decline in payments under our time charters, could have a material adverse effect on our business, results of operations and financial condition, revenues and cash flow and our ability to pay distributions to our unitholders. A decrease in the level of China’s export of goods or an increase in trade protectionism could have a material adverse impact on our char- terer’s business and, in turn, could cause a material adverse impact on our results of operations, financial condition and cash flows. 13 ANNUAL REPORT 2012 China exports considerably more goods than it imports. Our containerships are deployed on routes involving containerized trade in and out of emerging markets, and our charterers’ container shipping and business revenue may be derived from the shipment of goods from the Asia Pacific region to various overseas export markets including the United States and Europe. Any reduction in or hindrance to the output of China-based exporters could have a material adverse effect on the growth rate of China’s exports and on our charterers’ business. For in- stance, the government of China has implemented economic policies aimed at increasing domestic consumption of Chinese-made goods. This may have the effect of reducing the supply of goods available for export and may, in turn, result in a decrease of demand for container ship- ping. Additionally, though in China there is an increasing level of autonomy and a gradual shift in emphasis to a “market economy” and en- terprise reform, many of the reforms, particularly some limited price reforms that result in the prices for certain commodities being princi- pally determined by market forces, are unprecedented or experimental and may be subject to revision, change or abolition. The level of im- ports to and exports from China could be adversely affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government. Our operations expose us to the risk that increased trade protectionism will adversely affect our business. If the incipient global recovery is undermined by downside risks and the recent economic downturn is prolonged, governments may turn to trade barriers to protect their do- mestic industries against foreign imports, thereby depressing the demand for shipping. Specifically, increasing trade protectionism in the mar- kets that our charterers serve has caused and may continue to cause an increase in (i) the cost of goods exported from China, (ii) the length of time required to deliver goods from China and (iii) the risks associated with exporting goods from China, as well as a decrease in the quan- tity of goods to be shipped. Any increased trade barriers or restrictions on trade, especially trade with China, would have an adverse impact on our charterers’ business, operating results and financial condition and could thereby affect their ability to make timely charter hire pay- ments to us and to renew and increase the number of their time charters with us. This could have a material adverse effect on our business, results of operations and financial condition and our ability to pay distributions to our unitholders. Containership values decreased significantly in 2008 and 2009 and have remained at depressed levels through 2012. Containership val- ues may decrease further and over time may fluctuate substantially. If these values are low at a time when we are attempting to dispose of a vessel, we could incur a loss. Containership values can fluctuate substantially over time due to a number of different factors, including: prevailing economic conditions in the markets in which containerships operate, reduced demand for containerships, including as a result of a substantial or extended decline in world trade, increases in the supply of containership capacity, prevailing charter rates and the cost of retrofitting or modifying existing ships to respond to technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, or otherwise. If the market values of our vessels deteriorate significantly, we may be required to record an impairment charge in our financial statements, which could adversely affect our results of operations. If a charter expires or is terminated, we may be unable to re-charter the vessel at an acceptable rate and, rather than continue to incur costs to maintain the vessel, may seek to dispose of it. Our inability to dispose of the con- tainership at a reasonable price could result in a loss on its sale and adversely affect our results of operations and financial condition. RISKS RELATING TO OUR BUSINESS AND OPERATIONS We may not be able to grow or to effectively manage our growth. Our future growth will depend upon a number of factors, some of which we cannot control. These factors include our ability to: capitalize on opportunities in the crude and product tanker market by fixing period charters for our vessels at attractive rates; identify businesses engaged in managing, operating or owning vessels for acquisitions or joint ventures; identify vessels and/or shipping companies for acquisitions; access financing and obtain required financing for existing and new operations, including refinancing of existing indebtedness; integrate any acquired businesses or vessels successfully with existing operations; hire, train and retain qualified personnel to manage, maintain and operate its growing business and fleet; identify additional new markets; improve operating and financial systems and controls; complete accretive transactions in the future; and • • • • • • • • • • maintain our commercial and technical management agreements with Capital Maritime or other competent managers. Our ability to grow is in part dependent on our ability to expand our fleet through acquisitions of suitable vessels. We may not be able to acquire newbuildings or secondhand vessels on favorable terms, which could impede our growth and negatively impact our financial condi- tion and ability to pay distributions. We may not be able to contract for newbuildings or locate suitable vessels or negotiate acceptable construction 14 ANNUAL REPORT 2012 or purchase contracts with shipyards and owners, or obtain financing for such acquisitions on economically acceptable terms, or at all. The failure to effectively identify, purchase, develop, employ and integrate any vessels or businesses could adversely affect our business, financial condition and results of operations and our ability to make cash distributions. Fees and cost reimbursements paid by us to Capital Maritime for services provided to us and certain of our subsidiaries are substantial, fluctuate, cannot be easily predicted and may reduce our cash available for distribution to our unitholders. We have entered into three separate technical and commercial management agreements with Capital Ship Management for the manage- ment of our fleet: the fixed fee management agreement, the floating fee management agreement and, with respect to the vessels acquired as part of the merger with Crude Carriers, the Crude Carriers management agreement. Each vessel in our fleet is managed under the terms of one of these three agreements. Please read “Item 4B: Business Overview—Our Management Agreements” for a detailed description of the main terms of our three management agreements. The expenses incurred under our three management agreements depend upon a variety of factors, many of which are beyond our or our manager’s control. Some of these costs, primarily relating to crewing, insurance and enhanced security measures have been increasing and may increase in the future. Increases in any of these costs would decrease our earnings, cash flows and the amount of cash available for dis- tribution to our unitholders. We expect that as the fixed fee management agreement expires for vessels currently managed under it, such vessels, and any additional acquisitions we make in the future, shall be managed under floating fee management agreements, on similar terms to the ones currently in place. It is possible that the level of our operating costs may materially change following any such renewal. Any increase in the costs and ex- penses associated with the provision of these services by our manager in the future, such as the condition and age of our vessels, costs of crews for our time chartered vessels and insurance, will lead to an increase in the fees we would have to pay to Capital Ship Management or an- other third party under any new agreements we enter into. The payment of fees to Capital Ship Management and compensation for expenses and liabilities incurred on our behalf, as well as the costs associated with future drydockings and/or intermediate surveys or our vessels, which are expected to be significant, could adversely affect our business, financial condition, and results of operations, including our ability to make cash distributions. We cannot assure you that we will pay any distributions. We currently observe a cash dividend and cash distribution policy implemented by our board of directors. The actual declaration of fu- ture cash distributions, and the establishment of record and payment dates, is subject to the terms of our Second Amended and Restated Agree- ment of Limited Partnership, as amended (the “partnership agreement”) and final determination by our board of directors each quarter after its review of financial performance. Our ability to pay distributions in any period will depend upon factors including but not limited to financial condition, results of operations, prospects and applicable provisions of Marshall Islands law. Further, holders of our common units are sub- ject to the prior distribution rights of any holders of our preferred units then outstanding. As of the date of this Annual Report, there were 15,555,554 units of Class B Units issued and outstanding, of which 3,433,333 were owned by Capital Maritime. Under the terms of our partnership agree- ment, we are prohibited from declaring and paying distributions on our common units until we declare and pay (or sets aside for payment) full distributions on the Class B Units. We may not have sufficient cash available each quarter to pay the declared quarterly distribution per Class B or per common unit following establishment of cash reserves and payment of fees and expenses. The timing and amount of distributions, if any, could be affected by factors affecting cash flows, results of operations, required capital expenditures, compliance with our loan covenants, or reserves. Maintaining the distribution policy will depend on shipping market develop- ment and the charter rates we earn when we recharter our vessels, our cash earnings, financial condition and cash requirements and could be affected by factors, including the loss of a vessel, required capital expenditures, reserves established by our board of directors, increased or unanticipated expenses, additional borrowings and compliance with our loan covenants as well as our ability to refinance existing indebted- ness, asset valuations, or future issuances of securities, which may be beyond our control. Under Marshall Islands law, a limited partnership shall not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership in- terests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, exceed the fair value of the assets of the limited partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that liability. 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 15 ANNUAL REPORT 2012 losses and may not make cash distributions during periods when we record net income. Our distribution policy may be changed at any time, and from time to time, by our board of directors. Our common units are equity securities and are subordinate to our existing and future indebtedness and our preferred units. Our common units are equity interests in us and do not constitute indebtedness. The common units rank junior to all indebtedness and other non-equity claims on us with respect to the assets available to satisfy claims, including a liquidation of CPLP. Additionally, holders of the common units are subject to the prior distribution and liquidation rights of any holders of the Class B Units and any other preferred units we may issue in the future. As long as our outstanding Class B Units remain outstanding, under the partnership agreement, distribution payments relating to our com- mon units are prohibited until all accrued and unpaid distributions are paid on the Class B Units. Our board of directors is authorized to issue additional classes or series of preferred units without the approval or consent of the holders of our common units. In addition, holders of the Class B Units have the right to convert all or a portion of their Class B Units at any time into common units. Any such actions could adversely affect the market price of our common units. If we reduce or eliminate the replacement capital expenditures deducted from our operating surplus, our growth and the future income generating capacity of our fleet may be significantly affected. Our partnership agreement requires our board of directors to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In the past we have made substantial capital expenditures to expand and renew our fleet, which also reduced the amount of cash available for distribution to our unitholders. Replacement capital expenditures include capital expenditures associated with an estimation for future acquisitions of new vessels or a replacement of a vessel in our fleet in order to maintain and grow the income generating capacity of our fleet. These expenditures could increase as a result of changes in: • • • • • • • • the value of the vessels in our fleet; the cost of our labor and materials; the cost and replacement life of suitable replacement vessels; customer/market requirements; increases in the size of our fleet; the age of the vessels in our fleet; charter rates in the market; and governmental regulations, industry and maritime self-regulatory organization standards relating to safety, security or the environment. The amount of estimated 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. In years when estimat- ed 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 es- timated replacement capital expenditures, we may have less cash available for distribution in future periods when actual capital expenditures exceed our previous estimates. Our board of directors has recently elected not to deduct any replacement capital expenditures from our operating surplus which may af- fect our ability to acquire new vessels or replace a vessel in our fleet, as well as our future income generating capacity. We separately account for the maintenance capital expenditures required to maintain the operating quality of our vessels as we incur main- tenance expenses as part of our operating expenses, including any costs associated with scheduled drydockings. We may have to separately provide for estimated capital expenditures associated with drydocking and, in addition to estimated replacement capital expenditures, deduct these from our operating surplus also. As our vessels come up for their scheduled drydockings the number of offhire days of our fleet and operating expenses will increase and our cash available for distribution to our unitholders may decrease. During 2013, a number of vessels managed under our fixed fee management agreement are scheduled for their next special or interme- diate survey and associated drydocking. Once a vessel is put into drydock, it is automatically considered to be off-hire in connection with such special or intermediate survey and associated drydocking, which means that for such period of time this vessel will not be earning any rev- enues. In addition, during the drydocking of our vessels, we may incur certain costs, the levels of which are not possible to predict, are not 16 ANNUAL REPORT 2012 covered under this management agreement, which we will have to reimburse to our manager. Consequently, as our vessels’ scheduled dry- docking approaches, the number of offhire days of our fleet and operating expenses will increase, which may materially affect our cash avail- able for distribution to our unitholders. If our vessels suffer damage due to the inherent operational risks of the shipping industry, we may experience unexpected drydocking costs and delays or total loss of our vessels, which may adversely affect our business and financial condition. Our vessels and their cargoes are at risk of being damaged or lost because of events such as marine disasters, bad weather, business in- terruptions caused by mechanical failures, grounding, fire, explosions and collisions, human error, war, terrorism, piracy and other circum- stances or events. In addition, the operation of tankers has unique operational risks associated with the transportation of oil. Compared to oth- er types of vessels, tankers are exposed to a higher risk of damage and loss by fire, whether ignited by a terrorist attack, collision or other cause, due to the high flammability and high volume of the oil transported in tankers. If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and may be substantial. We may have to pay drydocking costs that our insurance does not cover in full. The loss of earnings while these vessels are be- ing repaired and repositioned, as well as the actual cost of these repairs, may adversely affect our business and financial condition. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located. We may be unable to find space at a suitable drydocking facility or our vessels may be forced to travel to a drydocking facility that is not conveniently located to our vessels’ positions. The loss of earnings while these vessels are forced to wait for space or to travel to more distant drydocking facilities may adversely affect our business and financial condition. Further, the total loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator. If we are unable to adequately maintain or safeguard our vessels, we may be unable to prevent any such damage, costs, or loss that could negatively impact our business, financial condition, results of operations, cash flows and ability to pay dividends. Arrests of our vessels by maritime claimants could cause a significant loss of earnings for the related off-hire period. Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In certain cases, maritime claimants may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages of its Manager. In many jurisdictions, a maritime lienholder may enforce its lien by “arresting” or “at- taching” a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could result in a significant loss of earnings for the related off-hire period. In addition, in jurisdictions where the “sister ship” theory of liability applies, a claimant may arrest the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. In countries with “sister ship” liability laws, claims might be asserted against us or any of our vessels for liabilities of other vessels that we own. Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings. A government of a vessel’s registry could requisition for title or seize our vessels. Requisition for title occurs when a government takes control of a vessel and becomes the owner. A government could also requisition our vessels for hire. Requisition for hire occurs when a gov- ernment takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a peri- od of war or emergency. Government requisition of one or more of our vessels could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends. Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business. Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea and in the Gulf of Aden off the coast of Somalia. Over the last several years, the frequency of piracy incidents has increased significantly, particularly in the Gulf of Aden and towards the Mozambique Channel in the North Indian Ocean. If these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones, as the Gulf of Aden temporarily was in May 2008, or Joint War Committee “war and strikes” listed areas, premiums payable for insurance coverage for our vessels could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may be incurred due to the deployment of onboard security guards, could increase in such circumstances. While the use of security guards is intended to deter and prevent the hijacking of our vessels, it could also increase our risk of liability for death or injury to persons or damage to personal property. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of in- surance for our vessels, could have a material adverse impact on our business, results of operations, cash flows, financial condition and abil- ity to make cash distributions as well as resulting in increased costs and decreased cash flows to our customers impairing their ability to make payments to us under our charters. 17 ANNUAL REPORT 2012 Increases in fuel prices could adversely affect our profits. We are responsible for the cost of fuel in the form of bunkers, which is a significant vessel expense, at any time our vessels are trading in the spot market, are offhire or during the drydocking of any of our vessels. In addition, spot charter arrangements generally provide that the vessel owner, or pool operator where relevant, bear the cost of fuel. Because we do not intend to hedge our fuel costs, an increase in the price of fuel beyond our expectations may adversely affect our profitability, cash flows and ability to pay dividends. The price and supply of fuel is unpredictable and fluctuates as a result of events outside our control, including geo-political developments, supply and demand for oil and gas, actions by members of OPEC and other oil and gas producers, war and unrest in oil producing countries and regions, regional produc- tion patterns and environmental concerns and regulations. Changes in the actual price of fuel at the time the charter is to be performed could result in the charter being performed at a significantly greater or lesser cost than originally anticipated and may result in losses or diminished profits. RISKS RELATING TO FINANCING ACTIVITIES If the contraction of the global credit markets and the resulting volatility in the financial markets and limited availability of funding con- tinues or worsens, it may have a material adverse impact on our results of operations and on our ability to obtain bank financing and/or to access the capital markets for future debt or equity offerings. The restrictions imposed by our credit facilities may also limit our abili- ty 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, or pursue other potential growth opportunities. Since 2008, a number of major financial institutions have experienced serious financial difficulties and, in some cases, have entered into bankruptcy proceedings or are in regulatory enforcement actions. These difficulties have resulted, in part, from declining markets for assets held by such institutions, particularly the reduction in the value of their mortgage and asset-backed securities portfolios. These difficulties have been compounded by financial turmoil affecting the world’s debt, credit and capital markets, and the general decline in the willingness by banks and other financial institutions to extend credit, particularly in the shipping industry due to the historically low vessel values and, in part, due to changes in overall banking regulations (Basel III). Given these conditions, the ability of banks and credit institutions to finance new projects, including the acquisition of new vessels in the future, is uncertain. In addition, these difficulties may adversely affect the financial institutions that provide our credit facilities and may impair their ability to continue to perform under their financing obligations to us, which could have an impact on our ability to fund current and future obligations. Furthermore, our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial con- dition at the time of any such financing or offering, as well as by the continuing adverse market conditions, including weakened demand for, and increased supply of, product tankers, resulting from, among other things, general economic conditions, weakness in the financial mar- kets and contingencies and uncertainties that are beyond our control. The restrictions imposed by our credit facilities, including the obliga- tion to comply with certain collateral maintenance and other requirements, may further restrict our ability to access available financing. Con- tinued access to the capital markets is not assured. If we are unable to obtain additional credit or draw down upon borrowing capacity, it may negatively impact our ability to fund current and future obligations. In addition, the severe deterioration in the banking and credit markets has resulted in potentially higher interest costs and overall limited availability of liquidity, which may further affect our ability to complete any future purchases of vessels from Capital Maritime or from third parties or to refinance our debt. Furthermore, banks and financial in- stitutions are faced with ongoing financial difficulties, and increased scrutiny by credit rating agencies means that there may be no funding available from banks limiting our ability to refinance our debt. Our failure to obtain the funds for necessary future capital expenditures and for the refinancing of our debt could also have a material adverse impact on our business, results of operations and financial condition, our ability to grow and make cash distributions and could cause the market price of our common units to decline. Disruptions in world financial markets and further governmental action in the United States and in other parts of the world could have a material adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our com- mon units decline. Since 2008, global financial markets have experienced extraordinary disruption and volatility following adverse changes in the global cred- it markets. The credit markets in the United States have experienced significant contraction, deleveraging and reduced liquidity, and governments around the world have taken highly significant measures in response to such events, including the enactment of the Emergency Economic Stabilization Act of 2008 in the United States, and may implement other significant responses in the future. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements. The SEC, other regulators, self-regulatory organizations and exchanges have enacted temporary emergency regulations and may take other extraordinary actions in the event of mar- ket emergencies and may affect permanent changes in law or interpretations of existing laws. Any changes to securities, tax, environmental, or the laws of regulations, could have a material adverse effect on our results of operations, financial condition or cash flows and could cause the market price of our common units to decline. 18 ANNUAL REPORT 2012 A limited number of financial institutions hold our cash including financial institutions located in Greece. We maintain our cash with a limited number of financial institutions, including institutions located in Greece. Of these financial institu- tions located in Greece, some are subsidiaries of international banks and others are Greek financial institutions. These balances may not be covered by insurance in the event of default by these financial institutions. The ongoing fiscal situation in Greece, including the possibility of further sovereign credit rating downgrades and the restructuring of Greece’s sovereign debt, as well as a potential exit from the Euro, may result in an event of default by some or all of these financial institutions. The occurrence of such a default could have a material adverse ef- fect on our business, financial condition, results of operations and cash flows. We have incurred significant indebtedness which could adversely affect our ability to further finance our operations, pursue desirable busi- ness opportunities or successfully run our business in the future as well as our ability to make cash distributions . As of December 31, 2012 our total debt was $458.4 million consisting of: (i) $250.9 million outstanding under the credit facility we en- tered into in 2007, as amended, (the “2007 credit facility”), (ii) $188.5 outstanding under the credit facility we entered into in 2008, as amend- ed, (the “2008 credit facility”), and (iii) $19.0 million outstanding under the credit facility we entered into in 2011, as amended, (the “2011 credit facility”). All facilities are non-amortizing until March 2016. Our leverage and debt service obligations could have significant additional consequences, including the following: • • If future cash flows are insufficient, we may need to incur further indebtedness in order to make the capital expenditures and other expenses or investments we have planned. If future cash flows are insufficient and we are not able to service our debt or, when the non-amortizing period of our existing credit facilities expires, to refinance our existing indebtedness, our obligation to make principal payments under our credit facilities may force us to take actions such as reducing or eliminating distributions, reducing or delaying business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protec- tion. • Our indebtedness will have the general effect of reducing our flexibility to react to changing business and economic conditions inso- • far as they affect our financial condition and, therefore, may pose substantial risk to our unitholders. In the event that we are liquidated, any of our senior or subordinated creditors and any senior or subordinated creditors of our sub- sidiaries will be entitled to payment in full prior to any distributions to the holders of our common units. • Our 2007, 2008 and 2011 credit facilities mature in 2017, 2018 and 2018, respectively. Our ability to secure additional financing pri- or to or after that time, if needed, may be substantially restricted by the existing level of our indebtedness and the restrictions con- tained in our debt instruments. Upon maturity, we will be required to dedicate a substantial portion of our cash flow to the payment of such debt, which will reduce the amount of funds available for operations, capital expenditures and future business opportunities. The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to make distributions and to satisfy its obligations under our credit facilities or any debt securities. Our credit facilities contain, and we expect that any new or amended 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 new or amended credit facility we enter into in the future could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activi- ties. For example, our credit facilities require the consent of our lenders to, or limit our ability to, among other items: • • • • • • incur or guarantee indebtedness; charge, pledge or encumber the vessels; change the flag, class, management or ownership of our vessels; change the commercial and technical management of our vessels; sell or change the beneficial ownership or control of our vessels; and subordinate our obligations thereunder to any general and administrative costs relating to the vessels, including the fixed daily fee payable under the management agreement. 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 amended credit facilities require us to: • maintain minimum free consolidated liquidity (50% of which may be in the form of undrawn commitments under the relevant cred- it facility) of at least $500,000 per collateralized vessel; 19 ANNUAL REPORT 2012 • maintain a ratio of EBITDA (as defined in each credit facility) to net interest expense of at least 2.00 to 1.00 on a trailing four-quar- ter basis; and • maintain a ratio of net Total Indebtedness to the aggregate Fair Market Value (as defined in each credit facility) of our total fleet, cur- rent or future, of no more than 0.725 (the “leverage ratio”). In addition, our credit facilities require that we maintain an aggregate fair market value of the vessels in our fleet at least 125% of the ag- gregate amount outstanding under each credit facility (the “collateral maintenance”). The interest margin of our credit facilities was amend- ed to 2.0% for our 2007 credit facility and 3.0% for our 2008 credit facility in connection with the issuance and sale of our Class B Units. The interest margin for our 2011 credit facility is 3.25%. Our ability to comply with the covenants and restrictions contained in our credit fa- cilities may be affected by events beyond our control, including prevailing economic, financial and industry conditions, interest rate devel- opments, changes in the funding costs of our banks and changes in asset valuations. If market or other economic conditions further deterio- rate or fail to improve, our ability to comply with these covenants may be impaired. If we are in breach of any of the restrictions, covenants, ratios or tests in our credit facilities, especially if we trigger a cross-default currently contained in our credit facilities, a significant portion of our obligations may become immediately due and payable, and our lenders’ commitment to make further loans to us may terminate and we may be forced to suspend our distributions. We may not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, obligations under our credit facilities are secured by our vessels, and if we are unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets. Furthermore, any contemplated vessel acquisitions will have to be at levels that do not impair the required ratios set out above. The re- cent global economic downturn has had an adverse effect on vessel values which is likely to persist if the economic slowdown resumes. 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 out- standing debt in order to remain in compliance with the relevant covenants in our credit facilities. If funds under our credit facilities become unavailable as a result of a breach of our covenants or otherwise, we may not be able to perform our business strategy which could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions. If we default under our credit facilities, we could forfeit our rights in certain of our vessels and their charters and our ability to make cash distributions may be impaired. We have pledged all of our vessels as security to the lenders under our credit facilities. Default under these credit facilities, if not waived or modified, would permit the lenders to foreclose on the mortgages over the vessels and the related collateral, and we could lose our rights in the vessels and their charters. When final payment is due under loan agreements, we must repay any borrowings outstanding, including balloon payments. To the ex- tent that cash flows are insufficient to repay any of these borrowings or asset cover is inadequate due to a deterioration in vessel values, we will need to refinance some or all of our loan agreements, replace them with alternate credit arrangements or provide additional security. We may not be able to refinance or replace our loan agreements or provide additional security at the time they become due. In the event we are not able to refinance our existing debt obligations, or if our operating results are not sufficient to service current or future indebtedness, or to make relevant principal repayments if necessary, we may be forced to take actions such as reducing or eliminating distributions, reducing or delaying business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refi- nancing debt, or seeking additional equity capital or bankruptcy protection. In addition, the terms of any refinancing or alternate credit arrange- ment may restrict our financial and operating flexibility and our ability to make cash distributions. If we are in breach of any of the terms of our credit facilities, as amended, a significant portion of our obligations may become immedi- ately due and payable and our lenders’ commitments to make further loans to us may terminate. We may also be unable to execute our business strategy. Our ability to comply with the covenants and restrictions contained in our credit facilities and any other debt instruments we may enter into in the future may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If vessel valuations or market or other economic conditions deteriorate further, our ability to comply with these covenants may be impaired. If we are in breach of any of the restrictions, covenants, ratios or tests in our credit facilities, especially if we trigger a cross-default currently contained in our credit facilities or any interest rate swap agreements we have entered into pursuant to their terms, a significant portion of our obliga- tions may become immediately due and payable, and our lenders’ commitment to make further loans to us may terminate. We may not be able to reach agreement with our lenders to amend the terms of the loan agreements or waive any breaches and we may not have, or be able to obtain, sufficient funds to make any accelerated payments. In addition, obligations under our credit facilities are secured by our vessels, and if we are unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets. Furthermore, if funds under 20 ANNUAL REPORT 2012 our credit facilities become unavailable as a result of a breach of our covenants or otherwise, we may not be able to execute our business strat- egy which could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash dis- tributions. 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 fi- nancial covenants or upon the occurrence of an event of default or if the fair market value of the vessels in our fleet is less than 125% of the aggregate amount outstanding under each of our credit facilities. Events of default under our credit facilities include: • • • • • • • • • • • • • • failure to pay principal or interest when due; breach of certain undertakings, negative covenants and financial covenants contained in the credit facility, any related security doc ument or guarantee or the interest rate swap agreements, including failure to maintain unencumbered title to any of the vessel own- ing subsidiaries or any of the assets of the vessel owning subsidiaries and failure to maintain proper insurance; any breach of the credit facility, any related security document or guarantee or the interest rate swap agreements (other than breach- es described in the preceding two bullet points) if, in the opinion of the lenders, such default is capable of remedy and continues un- remedied for 20 days after written notice of the lenders; any representation, warranty or statement made by us in the credit facility or any drawdown notice thereunder or related security doc- ument or guarantee or the interest rate swap agreements is untrue or misleading when made; a cross-default of our other indebtedness of $5.0 million or greater or of the indebtedness of our subsidiaries of $750,000 or greater; • • we become, in the reasonable opinion of the lenders, unable to pay our debts when due; • any of our or our subsidiaries’ assets are subject to any form of execution, attachment, arrest, sequestration or distress in respect of a sum of $1.0 million or more that is not discharged within 10 business days; an event of insolvency or bankruptcy; cessation or suspension of our business or of a material part thereof; unlawfulness, non-effectiveness or repudiation of any material provision of our credit facility, of any of the related finance and guar- antee documents or of our interest rate swap agreements; failure of effectiveness of security documents or guarantee; the common units cease to be listed on the Nasdaq Global Market or on any other recognized securities exchange; any breach under any provisions contained in our interest rate swap agreements; termination of our interest rate swap agreements or an event of default thereunder that is not remedied within five business days; invalidity of a security document in any material respect or if any security document ceases to provide a perfected first priority secu- rity interest; failure by Maersk Line to comply with the terms of the two charters and we are unable to replace the charter in a manner that meets our obligations under the facilities; or any other event that occurs or circumstance that arises in light of which the lenders reasonably consider that there is a significant risk that we will be unable to discharge our liabilities under the credit facility, related security and guarantee documents or interest rate swap agreements. 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: Management’s Discussion and Analysis of Financial Condi- tion and Results of Operations” below. RISKS INHERENT IN OUR OPERATIONS We currently derive all of our revenues from a limited number of customers, and the loss of any customer or charter or vessel could re- sult 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, 2012, Capital Maritime and BP Shipping Limited accounted for 45% and 23% of our revenues, respectively. For the year ended December 31, 2011, Capital Maritime, BP Shipping Limited and subsidiaries of OSG accounted for 24%, 32% and 11% of our revenues, respectively. For the year ended December 31, 2010, BP Shipping Limited, Morgan Stanley Capital Group Inc. and subsidiaries of OSG accounted for 49%, 11% and 11% of our revenues, respectively. We could lose a customer, including Capital Maritime, or the ben- efits of some or all of a charter if: 21 ANNUAL REPORT 2012 • • • • • • • the customer faces financial difficulties forcing it to declare bankruptcy or making it impossible for it to perform its obligations un- der the charter, including the payment of the agreed rates in a timely manner; the customer fails to make charter payments because of its financial inability or its inability to trade our and other vessels profitably or due to the occurrence of losses due to the weaker charter markets; the customer fails to make charter payments due to disagreements with us or otherwise; the customer tries to re-negotiate the terms of the charter agreement due to prevailing economic and market conditions; the customer exercises certain rights to terminate the charter or purchase the vessel; the customer terminates the charter because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the charter; or a prolonged force majeure event affecting the customer, including damage to or destruction of relevant production facilities, war or political unrest prevents us from performing services for that customer. Please read “Item 4B: Business Overview —Our Customers and —Our Charters” below for further information on our customers. On November 14, 2012, OSG and certain of its subsidiaries made a voluntary filing for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. As of December 31, 2012, we had three IMO II/III Chemical/Product tankers (the M/T Alexandros II, the M/T Aristotelis II and the M/T Aris II) on long term bareboat charter to subsidiaries of OSG. These charters are scheduled to terminate, approximately, in February, July and September of 2018, respectively, and are at rates that are substantially above cur- rent market rates. OSG has requested that we reduce the charter rates for their remaining terms to substantially lower rates. We have been in discussions with OSG regarding this matter. No assurance can be given that we will reach an agreement with OSG regarding the remaining duration, rate and terms of the charters, or our rights in the bankruptcy proceeding, or, if any such agreement is reached, that it will be ap- proved by the bankruptcy court, which could have an adverse effect on our results of operations and our future revenues from these vessels. If we lose a key charter, including OSG, 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 rev- enues from that vessel, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition and may also have to enter into costly and lengthy legal proceedings in order to reserve our rights. Until such time as the vessel is rechartered, 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 ex- ercises its right to purchase a vessel, we would not receive any further revenue from the vessel and may be unable to obtain a substitute ves- sel 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 fa- vorable to us as those of the terminated charter. Any compensation under our charters for a purchase of the vessels may not adequately com- pensate 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 materi- al adverse effect on our business, results of operations and financial condition and our ability to make cash distributions. One of our largest customers, BP Shipping Limited, has been adversely affected by the oil leak in the Gulf of Mexico. The oil leak also may result in additional or changes to existing regulation that could result in additional costs to us or expose us to additional liabilities. One of our largest customers, BP Shipping Limited, is an affiliate of BP p.l.c. (“BP”). BP and its affiliates have been materially adverse- ly affected by the explosion onboard the semisubmersible drilling rig Deepwater Horizon in the Gulf of Mexico in April 2010 and the resulting oil leak from a well being operated by an affiliate of BP and in which such affiliate had a majority working interest. As of December 31, 2012 six of our vessels were chartered to BP or its affiliates. BP Shipping Limited accounted for approximately 23%, 32% and 49% of our rev- enues for the years ended December 31, 2012, 2011 and 2010, respectively. Future costs associated with the Gulf of Mexico oil spill could adversely affect BP and could, in turn, have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to meet our obligations and to make cash distributions. The United States Oil Pollution Act of 1990 (“OPA 90”) regulations or implementation may become more stringent in application in the future. Our operations may be subject to more rigorous preparedness requirements and practice demonstrations, more unannounced exercis- es and increased penalties for any failure to demonstrate preparedness and additional disaster response planning. Increased requirements un- der the OPA 90 or state laws could subject us to increased liabilities in the event of a disaster and increased operating costs. We depend on Capital Maritime and its affiliates to assist us in operating and expanding our business. If Capital Maritime is materially adversely affected by the ongoing market fluctuations and risks or suffers material damage to its reputation it may affect its ability to com- ply with the terms of its charters with us or provide us with the necessary level of services to support and expand our business. 22 ANNUAL REPORT 2012 As of December 31, 2012 nine of our 25 vessels were under charter with Capital Maritime. In the future we may enter into additional con- tracts with Capital Maritime to charter our vessels as they become available for rechartering. Capital Maritime is subject to the same risks and market fluctuations as all other charterers. In the event Capital Maritime is affected by the ongoing market downturn and limited avail- ability of financing it may default under its charters with us, which would materially adversely affect our operations and ability to make cash distributions. In addition, pursuant to our management and administrative services agreements 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, fi- nancial and other support services to us. Please read “Item 7B: Related-Party Transactions—Transactions entered into during the year ended December 31, 2012” and “—Transactions entered into during the year ended December 31, 2011” below for a description of all our manage- ment agreements. Our operational success and ability to execute our growth strategy will depend significantly upon Capital Ship Management’s satisfactory performance of these services. In the event Capital Maritime is materially affected by the ongoing market downturn and cannot support Capital Ship Management and Capital Ship Management fails to perform these services satisfactorily, or cancels or materially amends either of these agreements, or if Capital Ship Management stops providing these services to us, our business will be materially harmed. 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, justifiably or not, or relationships, it may harm our ability to: renew existing charters upon their expiration; obtain new charters; successfully interact with shipyards during periods of shipyard construction constraints; obtain financing on commercially acceptable terms; or • • • • • maintain satisfactory relationships with suppliers and other third parties. Finally, we may also contract with Capital Maritime for it to have newbuildings constructed on our behalf and to incur the construction- related financing, and we would purchase the vessels on or after delivery based on an agreed-upon price. If Capital Maritime is unable to meet the payments under any such contract we enter into, it could have a material adverse effect on our business, results of operations and finan- cial condition and our ability to make cash distributions. 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 oper- ations and financial condition and our ability to make cash distributions. Our growth depends primarily on continued growth in demand for refined products and crude oil and the continued demand for their seaborne transportation as well as on general trends in the shipping industry that may also affect the container carrier and dry bulk trade. Our growth strategy depends primarily on developments 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 economic and financial developments globally, including actual and projected global economic growth; fluctuations in the actual or projected price of refined products and crude oil; refining capacity and its geographical location; increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets; decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil less attractive or energy conservation measures; availability of new, alternative energy sources; and negative or deteriorating global or regional economic or political conditions, particularly in oil consuming regions, which could re- duce energy consumption or its growth. The refining industry has been negatively affected by the economic downturn and in certain cases industry participants have postponed or cancelled certain investment expansion plans, including plans for additional refining capacity. Continued reduced demand for refined prod- ucts and crude oil and the shipping of refined products or crude oil or the increased availability of pipelines used to transport refined prod- ucts or crude oil, would have a material adverse effect on our future growth and could harm our business, results of operations, cash flows and financial condition. 23 ANNUAL REPORT 2012 Our tanker 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 ship- ping 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 sophis- ticated and comprehensive risk assessment of both the vessel operator and the vessel, including physical ship inspections, completion of ves- sel 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: • • • • • • • • • • • office assessments and audits of the vessel operator; the operator’s environmental, health and safety record; compliance with the standards of the International Maritime Organization (the “IMO”), a United Nations agency that issues interna- tional trade standards for shipping; compliance with heightened industry standards that have been set by several oil companies; shipping industry relationships, reputation for customer service, technical and operating expertise; compliance with oil majors codes of conduct, policies and guidelines, including transparency, anti-bribery and ethical conduct requirements and relationships with third parties; shipping experience and quality of ship operations, including cost-effectiveness; quality, experience and technical capability of crews; the ability to finance vessels at competitive rates and overall financial stability; relationships with shipyards and the ability to obtain suitable berths; construction management experience, including the ability to procure on-time delivery of new vessels according to customer speci- fications; • willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and competitiveness of the bid in terms of overall price. • Should either Capital Maritime or 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 ob- tain new charterers, whether medium- or long-term, could be adversely affected. Such a situation may lead to the oil majors’ terminating ex- isting 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. If we purchase and operate secondhand vessels, we will be exposed to increased operating costs which could adversely affect our earn- ings and, as our fleet ages, the risks associated with older vessels could adversely affect our ability to obtain profitable charters. Our current business strategy includes additional growth through the acquisition of new and secondhand vessels. While we typically in- spect secondhand vessels prior to purchase, this does not provide us with the same knowledge about their condition that we would have had if these vessels had been built for and operated solely by us. Generally, we do not receive the benefit of warranties from the builders for the secondhand vessels that we acquire. Our fleet had an average age of approximately 5.8 years as of December 31, 2012. In general the costs to maintain a vessel in good operating condition increase with the age of the vessel. Older vessels are typically less fuel efficient than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates also increase with the age of a vessel making older vessels less desirable to charterers. We may not be able to expand the size of our fleet or replace aging vessels in the future which may affect our ability to pay distributions to you. Our ability to expand the size of our fleet or replace aging vessels in the future will be affected by our ability to acquire new vessels on favorable terms. From time to time, we expect to enter into agreements with Capital Maritime or other third parties to purchase additional newbuildings or other modern vessels (or interests in vessel owning companies). If Capital Maritime or any third party seller we may con- tract 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 and generating voy- age revenues, which could harm our business and our ability to make cash distributions. In addition, the market value of modern vessels or newbuildings is influenced by the ability of buyers to access debt and 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. The failure to effectively identify, purchase, de- velop, employ and integrate any vessels or businesses could adversely affect our business, financial condition and results of operations and our ability to make cash distributions. 24 ANNUAL REPORT 2012 If we finance the purchase of any additional vessels or businesses 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 gen- eration of any revenue. The actual cost of a new vessel 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 or- ganization standards. The total delivered cost of a vessel will be higher and include financing, construction supervision, vessel start-up and other costs. As of December 31, 2012, our fleet consisted of 25 vessels, only eight of which had been part of our initial fleet at the time of our IPO. We have financed the purchase of the additional vessels either with debt, or partly with debt, cash and partly by issuing additional equity securi- ties. We also acquired additional vessels through the acquisition of Crude Carriers in 2011. If we issue additional common units or other equi- ty securities to finance the acquisition of a vessel or business, your ownership interest in us will be diluted. Please read “Risks Inherent in an Investment in Us—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 re- quired 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 acquisitions 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 a business or 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. In- curring 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 unithold- ers, which could have a material adverse effect on our ability to make cash distributions. Political and government instability, terrorist or other attacks, war or international hostilities can affect the tanker industry, which may adversely affect our business. We conduct most of our operations outside of the United States. In particular, we derive a portion of our revenues from shipping oil and oil products from politically unstable regions and our business, results of operations, cash flows, financial condition and ability to make cash distributions may be adversely affected by the effects of political instability, terrorist or other attacks, war or international hostilities. Terror- ist attacks such as the attacks on the United States on September 11, 2001, the bombings in Spain on March 11, 2004 and in London on July 7, 2005, the current conflicts in Iraq and Afghanistan and other current and future conflicts and the continuing response of the United States to these attacks, as well as the threat of future terrorist attacks, continue to contribute to world economic instability and uncertainty in global fi- nancial markets. Future terrorist attacks could result in increased volatility of the financial markets in the United States and globally and could negatively impact the US and world economy, potentially leading to an economic recession. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all. In the past, political instability has also resulted in attacks on vessels, such as the attack on the M/T Limburg in October 2002, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. In addition, oil facilities, ship- yards, vessels, pipelines and oil and gas fields could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil and other refined products to or from certain locations. Any of these occurrences or other events beyond our control that ad- versely affect the distribution, production or transportation of oil and other refined products to be shipped by us could entitle our customers to terminate our charter contracts and could have a material adverse impact on our business, financial condition, results of operations, cash flows and ability to make cash distributions. Furthermore, 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 25 ANNUAL REPORT 2012 interfere with the operation of our vessels, which could harm our business, financial condition and results of operations. Our operations may also be adversely affected by expropriation of vessels, taxes, regulation, tariffs, trade embargoes, economic sanctions or a disruption of or lim- it 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. We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and anti-corruption laws in other applicable jurisdictions. As an international shipping company, we may operate in countries known to have a reputation for corruption. The U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and other anti-corruption laws and regulations in applicable jurisdictions generally prohibit companies registered with the SEC and their intermediaries from making improper payments to government officials for the purpose of obtaining or re- taining business. Under the FCPA, U.S. companies may be held liable for some actions taken by strategic or local partners or representatives. Legislation in other countries includes the U.K. Bribery Act, which became effective on July 1, 2011. The U.K. Bribery Act is broader in scope than the FCPA because it does not contain an exception for facilitating payments (i.e. payments to secure or expedite the performance of a “routine governmental action”) and covers bribes and payments to private businesses as well as foreign public officials. We and our customers may be subject to these and similar anti-corruption laws in other applicable jurisdictions. Failure to comply with such legal requirements could expose us to civil and/or criminal penalties, including fines, prosecution and significant reputational damage, all of which could materially and adversely affect our business and results of operations, including our relationships with our customers, and our financial results. Com- pliance with the FCPA, the UK Bribery Act and other applicable anti-corruption laws and related regulations and policies imposes potentially significant costs and operational burdens. Moreover, the compliance and monitoring mechanisms that we have in place may not adequately prevent or detect possible violations under applicable anti-bribery and anti-corruption legislation. Our vessels may call on ports located in countries that are subject to restrictions and sanctions imposed by the United States, the Euro- pean Union and other jurisdictions. Certain countries and persons are targeted by sanctions and embargoes imposed by the United States, the European Union and other ju- risdictions, and Cuba, Iran, Sudan and Syria are identified as state sponsors of terrorism. Such sanctions and embargo laws and regulations vary in their application. They do not apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be strengthened or otherwise amended over time. We generally do not do business in the targeted jurisdictions and have not entered into agreements or other arrangements with the governments or any governmental entities of Cuba, Iran, Sudan or Syria and have entertained no direct business contacts with officials or representatives of any such governments or entities. However, it is possible that the charterers of our vessels, or their subcharterer, may arrange for vessels in our fleet to call on ports located in these countries. In recent years, one focus of these sanctions, especially with respect to Iran, has been on shipping concerns. For example, in 2010, the United States enacted the Comprehensive Iran Sanctions Accountability and Divestment Act (“CISADA”), which amended and expanded the scope of the Iran Sanctions Act of 1996 (as amended, the “ISA”). Among other things, after CISADA, the ISA provides that sanctions may be imposed on any person who provides ships or shipping services to deliver refined petroleum products to Iran, subject to certain con- ditions. The Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITRA”) further adds to and strengthens U.S. sanctions regarding Iran. In particular, with regard to shipping concerns, the ITRA adds new categories of sanctionable commercial activities, including owner- ship, operation or control of a vessel that was used to transport crude oil from Iran to another country, subject to certain conditions and ex- ceptions. The ITRA also amended the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), to require that issuers re- quired to file with the SEC an annual or quarterly report under Section 13(a) of the Exchange Act to include in the applicable report disclo- sure as to whether such issuer or its affiliates have knowingly engaged in certain activities described in the ISA, CISADA and otherwise iden- tified by the new Exchange Act provision. In December 2012, the United States enacted the “Iran Freedom and Counter-Proliferation Act of 2012,” as a subtitle of the National Defense Authorization Act for Fiscal Year 2012 (the “IFCPA”), which, among other things, further tar- gets Iran’s ports, shipping, and ship-building sectors as entities of proliferation concern and authorizes the designation of persons and enti- ties operating a port in Iran, or who knowingly provides significant financial, material, technological or other support to, or goods and serv- ices in support of any activity or transaction on behalf of or for the benefit of such a port operator, as a Specially Designated Nationals and Blocked Person (“SDN”) to be listed on the U.S. Office of Foreign Assets Control’s (“OFAC”) list of Specially Designated Nationals and Blocked Persons (“SDN List”). The IFCPA also allows for sanctions to be imposed on any person who knowingly sells, supplies or transfers, direct- ly or indirectly, materials to be used in connection with the energy, shipping, or shipbuilding sectors of Iran, subject to certain conditions and exceptions. If it is determined that a person has engaged in sanctionable conduct under the ISA, the President of the United States (acting through the U.S. State Department and/or the U.S. Treasury Department) is required to impose at least five of twelve available sanctions. Sanctions in- clude denial of export licenses, restrictions or prohibition on extensions of loans or credit, loss of eligibility to be awarded government con- tracts, a prohibition on transactions in foreign exchange by the sanctioned company, a prohibition of any transfers of credit or payments be- 26 ANNUAL REPORT 2012 tween, by, through or to any financial institution to the extent the interest of a sanctioned company is involved, a ban on investment in the debt or equity securities of the sanctioned party, exclusion of the sanctioned entity’s corporate officers from the United States, sanctions im- posed directly on the principal executive officers of the sanctioned entity, and a requirement to “block” or “freeze” any property of the sanc- tioned company that is subject to the jurisdiction of the United States. In addition to these United States sanctions, the European Union has a variety of restrictive measures in force against Iran and Syria. Those measures include restrictions on the transportation of goods which could be used for nuclear enrichment related activities. Measures are also in place restricting the import, purchase and transport of Iranian or Syrian crude oil and the transportation of equipment used in the produc- tion of petroleum. In the case of Iran, those measures extend also to the import, purchase and transport of petrochemical products. We are mindful of the restrictions discussed above and contained in the other applicable sanctions and embargo laws of the United States, the European Union and other jurisdictions that limit the ability of companies and persons from doing business or trading with targeted coun- tries and persons. We believe that we are currently in compliance with all applicable sanctions and embargo laws and regulations. In order to maintain compliance, among other things, we monitor and review the movement of our vessels, as well as the cargo being trans- ported by our vessels, on a continuing basis. During 2012, our vessels made approximately 800 total calls on worldwide ports. None of the vessels in our fleet made any port calls in Cuba or Syria. Of the vessels in our fleet, three made one port call each to Iran representing ap- proximately 0.125% of our total calls, respectively, one of our chartered vessels made one port call to the Sudan and two port calls to Iran representing 0.375% of our total calls, and another one of our chartered vessels made one port call to the Sudan and three port calls to Iran representing approximately 0.5% of the total calls on worldwide ports. In addition, a vessel owned by our affiliate, Capital Maritime, made one port call to Iran. As part of the voyage charter arrangements between our affiliate Capital Maritime and third party charterers, Capital Mar- itime or its manager may pay fees and expenses related to the port calls made in Iran through a private third party agent in Iran appointed by the third party charterer, which in 2012 did not include any payments for refuelling or bunkers for the vessels making such port calls. The ten port calls made by CPLP vessels and the one port call made by a Capital Maritime vessel all occurred while the respective vessels were sub- let by their charterer under voyage charters to third parties. To the best of our knowledge, the vessels making these port calls were transport- ing either vegetable oils or molasses, not crude oil, petroleum, refined petroleum, petrochemical products, uranium or weapons, or other goods that are specially targeted by various sanctions and embargo laws of the United States, such as the ISA, or the European Union. We believe all such port calls were made in full compliance with relevant regulations, including those of the United States, the European Union and oth- er relevant jurisdictions. Our charter agreements include provisions that, on the one hand, restrict trades of our vessels to countries under sanctions or embargoes and, on the other, allow any transportation activities involving sanctioned countries to the extent permitted under the applicable sanction or embargo requirements. Our ordinary chartering policy is to try and include similar provisions in all of our period charters. More specifical- ly, our current charters proscribe trades of our vessels to Cuba and contain provisions to also exclude Iran in certain situations, including in the event that a boycott or further sanctions are imposed by a relevant jurisdiction regarding trade with Iran. Our charters at this time do not impose a blanket prohibition on port calls in Syria or the Sudan. Should one of our charterers engage in actions that involve us or our vessels and that may, if completed, represent material violations of sanctions and embargo laws or regulations, we would rely on our monitoring and control systems, including documentation, such as bills of lading, regular check-ins with the crews of our vessels and electronic tracking systems on our vessels, to detect such actions on a prompt ba- sis and seek to prevent them from occurring. Notwithstanding the above, we may not be able to comply at all future times with the applicable sanctions and embargo laws and regu- lations, particularly as the scope of certain of these laws and regulations may vary or be subject to changing interpretations. For example, it is possible that new sanctions-related legislation that could impact our business may be enacted in the future. In addition, it is possible that the charterers of our vessels may violate applicable sanctions, laws and regulations, using our vessels or otherwise. Although we do not be- lieve that current sanctions and embargoes prevent our vessels from making all calls to ports in these countries, potential investors could view such port calls negatively, which could adversely affect our reputation and the market for our common units. Moreover, although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, we may not be in compliance in the future, particularly as the scope of certain laws may be unclear, may be subject to changing interpretations or may be strengthened or otherwise amended. Any such violation could result in fines or other penalties and could result in some investors decid- ing, or being required, to divest their interest, or not to invest, in our common units. Additionally, some investors, including U.S. state pen- sion funds, may decide, or be required, to divest their interest, or not to invest, in our common units simply because we may do business with charterers that do business in sanctioned countries, or because of port calls of our vessels to ports of sanctioned countries, which could have a negative effect on the price of our common units or our ability to make distributions on our common units. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Investor perception of the value of our common units may also be adversely affected by the 27 ANNUAL REPORT 2012 consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries. Finally, future ex- pansion of sanctions against these or other countries could prevent our tankers from making any calls at certain ports, which potentially could have a negative impact on our business and results of operations. 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: • marine disasters; bad weather; • • mechanical failures; grounding, fire, explosions and collisions; • piracy; • • human error; and • war and terrorism. An accident involving any of our vessels could result in any of the following: • • • • • • • environmental damage, including potential liabilities or costs to recover any spilled oil or other petroleum products, pay for environ- mental damage and eco-system restoration where the spill occurred; death or injury to persons, loss of property; delays in the delivery of cargo; loss of revenues from or termination of charter contracts; governmental fines, penalties or restrictions on conducting business; higher insurance rates; and damage to our reputation and customer relationships generally. Any of these results could have a material adverse effect on our business, financial condition and operating results. Compliance with safety and other vessel requirements imposed by classification societies may be costly and could reduce our net cash flows and net income. The hull and machinery of every commercial vessel must be certified as being “in class” by a classification society authorized by its coun- try of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention. A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be placed on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. We expect our ves- sels to be on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel is also required to be drydocked every two to three years for inspection of its underwater parts, a cost which is undertaken by our manager under the terms of our management agreement. If any vessel does not maintain its class or fails any annual, intermediate or special survey, the vessel will be unable to trade between ports and will be unemployable, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to make cash distributions. Our insurance may be insufficient to cover losses that may occur to our property or result from our commercial operations. The operation of ocean-going vessels in international trade is inherently risky. Not all risks can be adequately insured against and any par- ticular claim upon our insurance may not be paid for any number of reasons. We do not currently maintain off-hire insurance, covering loss of revenue during extended vessel off-hire periods such as may occur whilst a vessel is under repair. Accordingly, even though a unique cov- er has been negotiated to mitigate such off-hire losses to a certain extent, any extended vessel off-hire due to an accident or otherwise, could have a materially adverse effect on our business and our ability to pay distributions to our unitholders. Claims covered by insurance are sub- ject to deductibles and since it is possible that a large number of claims may arise, the aggregate amount of these deductibles could be mate- rial. Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such asso- ciations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves. Please read “—We will be subject to funding calls by our protection and indemnity associations, and our associations may not have enough resources to cover claims made against them, resulting in potential unbudgeted supplementary liability to fund claims made upon us.” below. 28 ANNUAL REPORT 2012 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 Lim- ited and subsidiaries of OSG. 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 busi- ness and financial condition. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory organizations. Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In addition, the insurance that may be available to us may be significantly more expensive than our existing coverage. We will be subject to funding calls by our protection and indemnity associations, and our associations may not have enough resources to cover claims made against them, resulting in potential unbudgeted supplementary liability to fund claims made upon us. Cover for legal liabilities incurred in consequence of commercial operations is provided through membership in P&I Associations. P&I Associations are mutual insurance associations whose members must contribute proportionately to cover losses sustained by all the associa- tion’s members who remain subject to calls for additional funds if the aggregate premiums are insufficient to cover claims submitted to the association. Claims submitted to the Associations include those incurred by its members but also claims submitted by other P&I Associations under claims pooling agreements. The P&I Associations to which we belong may not remain viable and we may become subject to additional funding calls which could adversely affect us. The maritime transportation industry is subject to substantial environmental and other regulations, which may significantly limit our op- erations 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 pol- lution, 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 and natural resource damages, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with our operations. We could also be- come 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. OPA 90 affects all vessel owners shipping oil or petroleum products to, from or within United States territorial waters. OPA 90 allows for potentially unlimited cleanup 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 United States, imposes liability for oil pollution in in- ternational waters. OPA 90 expressly permits individual states to impose their own liability regimes with regard to hazardous materials and oil pollution incidents occurring within their boundaries. Coastal states in the U.S. have enacted pollution prevention liability and response laws, many providing for unlimited liability. In addition to complying with existing laws and regulations and those that may be adopted, shipowners may incur significant additional costs in meeting new maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtain- ing 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, recent amendments to MARPOL regulations regarding the prevention of air pollution from ships establish a series of progressively stricter standards to further limit the sulfur content in fuel oil, which will 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. Ad- ditionally, more stringent emission standards apply in the coastal areas designated as Emission Control Areas, including the Baltic Sea, the 29 ANNUAL REPORT 2012 North Sea, and the United States and Canadian coastal areas. Further legislation, or amendments to existing legislation, applicable to international and national maritime trade is expected over the com- ing years relating to environmental matters, such as ship recycling, sewage systems, emission control (including emissions of greenhouse gas- es), cold-ironing while docked and ballast treatment and handling. For example, legislation and regulations that will require more stringent controls of air emissions from ocean-going vessels are pending or have been approved at the federal and state level in the U.S. The relevant standards are consistent with the 2008 Amendments to Annex VI of MARPOL. Such legislation or regulations may require significant additional capital expenditures (such as additional costs required for the installation of control equipment on each vessel) or operating expenses (such as increased costs for low-sulfur fuel) in order for us to main- tain our vessels’ compliance with international and/or national regulations. In addition, various jurisdictions, including the IMO and the United States, have proposed or implemented requirements governing the management of ballast water to prevent the introduction of non-indigenous species considered to be invasive. The IMO has adopted the In- ternational Convention for the Control and Management of Ships’ Ballast Water and Sediments (the “BWM Convention”), which calls for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention will enter into force 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping tonnage. As of December 2011, 32 states, representing approximately 26.5% of the world’s merchant shipping tonnage, have ratified the BWM Convention. We may incur additional costs to install the relevant control equipment on our vessels in order to comply with the new standards. In the United States, ballast water management legislation has been enacted in several states, and federal legislation is currently pending in the U.S. Congress. In addition, the U.S. Environmental Protection Agency has also adopted a rule which requires commercial vessels to obtain a “Vessel General Permit” from the U.S. Coast Guard in compliance with the Federal Water Pollution Control Act (the “Clean Water Act”) regulating the discharge of ballast water and other discharges into U.S. waters. Significant expenditures for the installation of additional equipment or new systems on board our vessels may be required in order to comply with existing or future regulations regarding ballast wa- ter management in these other jurisdictions, along with the potential for increased port disposal costs. Other requirements may also come into force regarding the protection of endangered species which could lead to changes in the routes our vessels follow or in trading patterns generally and thus to additional operating expenditures. Additionally, new environmental regulations with respect to greenhouse gas emissions and preservation of biodiversity amongst others, may arise out of commitments made at interna- tional conferences such as periodic G8 and G20 summits through international environmental agreements and United Nations Climate Change Conferences. Furthermore, as a result of marine accidents we believe that regulation of the shipping industry will continue to become more stringent and more expensive for us and our competitors. In recent years, the IMO and EU have both accelerated their existing non-double-hull phase- out schedules in response to highly publicized oil spills and other shipping incidents involving companies unrelated to us. Future incidents may result in the adoption of even stricter laws and regulations, which could limit our operations or our ability to do business and which could have a material adverse effect on our business and financial results. Please read “Item 4B: Business Overview-Regulation” below for a more detailed discussion of the regulations applicable to our vessels. The crew employment agreements manning agents enter into on behalf of Capital Maritime or any of its affiliates, including Capital Ship Management, our manager, may not prevent labor interruptions and the failure to renegotiate these agreements successfully in the fu- ture 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 Capi- tal 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, results of operations, cash flows and financial condition 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, as amended and restated, Capital Maritime and its con- trolled affiliates (other than us, our general partner and our subsidiaries) have agreed not to acquire, own or operate product or crude oil tankers 30 ANNUAL REPORT 2012 with carrying capacity over 30,000 dwt under time or bareboat charters with a remaining duration, excluding any extension options, of at least twelve months at the earliest of the following dates: (a) the date the tanker to which such time or bareboat charter is attached is first acquired by Capital Maritime and its controlled affiliates and (b) the date on which a tanker owned by Capital Maritime or its controlled affiliates is put under such time or bareboat charter without the consent of our general partner or first offering such tanker vessel to us. Similarly, we may not acquire, own or operate product or crude oil tankers with carrying capacity under 30,000 dwt, other than vessels we had owned prior to the date of such restatement without first offering such tanker vessel first to Capital Maritime. In addition, both we and Capital have granted the other party a right of first offer on the transfer or re-chartering of any vessels with carrying capacity over 30,000 dwt. The omnibus agreement, how- ever, 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—Transactions entered into during the year ended December 31, 2011”. Capital Maritime is a privately held company and there is little publicly available information about it. Capital Maritime is our largest customer, with nine of our 25 vessels chartered to it as of December 31, 2012. In addition, our manager is a subsidiary of Capital Maritime. The ability of Capital Maritime to continue providing services for our benefit will depend in part on its own financial strength and reputation in the industry. Circumstances beyond our control could impair its financial strength, and because it is a privately held company, little or no information about its financial strength is publicly available, and also affect its relationships and reputations within the industry. As a result, an investor in our common units might have little advance warning of problems Capital Maritime, even though these problems could have a material ad- verse effect on us. Unitholders have limited voting rights and our partnership agreement restricts the voting rights of unitholders owning 5% or more of our units. Holders of common units have only limited voting rights on matters affecting our business. We hold a meeting of the limited partners every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. Common unitholders (excluding Capital Maritime and its affiliates) elect five of the eight members of our board of directors. We do not cur- rently have any outstanding subordinated units. The elected directors are elected on a staggered basis and serve for three-year terms. Our gen- eral 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 common unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management. Unitholders have no right to elect our general partner and our general partner may not be removed except by a vote of the holders of at least 66 2 / 3 % 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. Currently, 48,098,362 common units are owned by non-affiliated public unitholders, representing 69% of our common units and a 56% common unitholder interest in us overall. Our partnership agreement further restricts unitholders’ voting rights by providing that if any person or group, other than our general part- ner, 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 affiliates of our general partner, Capital Maritime and Crude Carri- ers Investments Corp. (“Crude Carriers Investments”), are not subject to this limitation. As of December 31, 2012, the Marinakis family, including Evangelos M. Marinakis, our chairman, may be deemed to beneficially own a 30.3% interest in us through its beneficial ownership, amongst others, of Capital Maritime, which owned a 26.2% interest in us, including 17,763,305 common units, 3,433,333 Class B Units and a 1.6% interest in us through its ownership of our general partner, and of Crude Car- riers Investments, which owned a 3.8% interest in us. Our general partner and its other affiliates own a significant interest in us and have conflicts of interest and limited fiduciary and con- tractual duties, which may permit them to favor their own interests to your detriment. Our general partner effectively controls our day-to-day affairs consistent with policies and procedures adopted by and subject to the direc- tion 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. The common units owned by affiliates of our general partner have the same rights as our other outstanding common units. However, the officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to Capital Mar- 31 ANNUAL REPORT 2012 itime. Furthermore, all of the officers of our general partner and certain of our directors are directors or officers of Capital Maritime and its af- filiates, and as such they have fiduciary duties to Capital Maritime that may cause them to pursue business strategies that disproportionately ben- efit Capital Maritime or which otherwise are not in the best interests of us or our unitholders. Conflicts of interest may arise between Capital Mar- itime 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 part- nership agreement limits our general partner’s and our directors’fiduciary duties to our unitholders and restricts the remedies available to unithold- ers for actions taken by our general partner or our directors” below. These conflicts include, among others, the following situations: • • • • • • • • • neither our partnership agreement nor any other agreement requires our general partner or Capital Maritime or its affiliates to pursue a business strategy that favors us or utilizes our assets, and Capital Maritime’s officers and directors have a fiduciary duty to make decisions in the best interests of the unitholders of Capital Maritime, which may be contrary to our interests; the executive officers of our general partner and three of our directors also serve as executive officers and/or directors of Capital Mar- itime; our general partner and our board of directors are allowed to take into account the interests of parties other than us, such as Capital Maritime, in resolving conflicts of interest, which has the effect of limiting their fiduciary duties to our unitholders; our general partner and our directors have limited their liabilities and reduced their fiduciary duties under the laws of the Marshall Is- lands, while also restricting the remedies available to our unitholders, and, as a result of purchasing our units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner and our directors, all as set forth in the partnership agreement; our general partner and our board of directors will be involved in determining the amount and timing of our asset purchases and sales, capital expenditures, borrowings, and issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders; our general partner may have substantial influence over our board of directors’ decision to cause us to borrow funds in order to per- mit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on any subordinated units or to make incentive distributions; our general partner is entitled to reimbursement of all reasonable costs incurred by it and its affiliates for our benefit; our partnership agreement does not restrict us from paying our general partner or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf; and our general partner may exercise its right to call and purchase our outstanding units if it and its affiliates own more than 90% of our common units. Although a majority of our directors are elected by common unitholders, our general partner has a 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, including votes cast by affiliates of our general partner. As of December 31, 2012, a 30.3% interest in us may be deemed to be owned by affiliates of our gener- al partner which can significantly impact any vote under the terms of our partnership agreement and may significantly affect your rights under the partnership agreement. In addition, affiliates of our general partner are not subject to the limitations on voting rights imposed on our other limited partners and may favor their own interests in any vote by our unitholders. Under the terms of our partnership agreement the affirmative vote of a majority of common units (or in certain cases a higher percent- age), are required in order to amend the terms of the partnership agreement or to reach certain decisions or actions, including: amendments to the definition of available cash, operating surplus, adjusted operating surplus; • changes in our cash distribution policy; • elimination of the obligation to pay the minimum quarterly distribution; • elimination of the obligation to hold an annual general meeting; • removal of any appointed director for cause; • transfer of the general partner interest; • transfer of the incentive distribution rights; • the ability of the board to sell, exchange or otherwise dispose of all or substantially all of our assets; • resolution of conflicts of interest; • • withdrawal of the general partner; removal of the general partner; • dissolution of the partnership; • change to the quorum requirements; • approval of merger or consolidation; and • 32 ANNUAL REPORT 2012 • any amendment to the partnership agreement. Capital Maritime, 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. Following the conversion of our subordinated units into com- mon units in February 2009, the risk of any shortfall in the payment of the quarterly distribution is now borne by our common unitholders, including Capital Maritime and Crude Carriers Investments, equally. Furthermore, our partnership agreement provides that any changes to the rights of the Class B unitholders must be approved by at least, 75% of the holders of such units, excluding units held by Capital Maritime and its affiliates. Please also read “—Unitholders have limited voting rights and our partnership agreement restricts the voting rights of unitholders own- ing 5% or more of our units” above for more information on additional restrictions imposed by our partnership agreement. We currently do not have any officers and rely, and expect to continue to rely, solely on officers of our general partner, who face conflicts in the allocation of their time to our business. Our board of directors has not exercised its power to appoint officers of Capital Product Partners L.P. to date, and as a result, we rely, and expect to continue to rely, solely on the officers of our general partner, who are not required to work full-time on our affairs and who also work for affiliates of our general partner, including Capital Maritime. For example, our general partner’s Chief Executive Officer and Chief Financial Officer is also an executive officer of Capital Maritime. The affiliates of our general partner conduct substantial businesses and ac- tivities 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 of- ficers 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: • • • • permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general part- ner. Where our partnership agreement permits, our general partner may consider only the interests and factors that it desires, and in such cases it has no duty or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unithold- ers. Decisions made by our general partner in its individual capacity will be made by its sole owner, Capital Maritime. Specifically, pursuant to our partnership agreement, our general partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights or registration rights, consents or withholds consent to any merger or consolidation of the partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on amendments to our partnership agree- ment that require a vote of the outstanding units, voluntarily withdraws from the partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units, general partner interest or incentive distribution rights or votes upon the dissolution of the partnership; provides that our general partner and our directors are entitled to make other decisions in “good faith” if they reasonably believe that the decision is in our best interests; generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of our board of directors and not involving a vote of unitholders must be on terms no less favorable to us than those generally being pro- vided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable”, our board of directors may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and provides that neither our general partner and its officers nor our directors will be liable for monetary damages to us, our limited part- ners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of compe- tent jurisdiction determining that our general partner or directors or its officers or directors or those other persons engaged in actual fraud or willful misconduct. 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. 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 gen- eral partner without Capital Maritime’s consent unless Capital Maritime’s ownership share in us is below a specified threshold, all of which could diminish the trading price of our units. 33 ANNUAL REPORT 2012 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 unitholders will be unable to remove our general partner without its consent because if general partner and its affiliates own suf- ficient units to be able to prevent such removal. The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class and a majority vote of our board of directors is required to remove the general partner. As of December 31, 2012, the Marinakis family, including Evangelos M. Marinakis, our chairman, may be deemed to beneficially own a 30.3% interest in us through its beneficial ownership, amongst others, of Capital Maritime, and of Crude Carriers Investments. • Common unitholders elect five of the eight members of our board of directors. Our general partner in its sole discretion has the right to appoint the remaining three directors. • Election of the five directors elected by common unitholders is staggered, meaning that the members of only one of three classes of our elected directors are selected each year. In addition, the directors appointed by our general partner will serve for terms determined by our general partner. • Our partnership agreement contains provisions limiting the ability of unitholders to call meetings of unitholders, to nominate direc- tors and to acquire information about our operations as well as other provisions limiting the unitholders’ ability to influence the man- ner or direction of management. • Unitholders’voting rights are further restricted by the partnership agreement provision providing that if any person or group, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of our board of direc- tors, owns beneficially 5% or more of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, except for purposes of nominating a person for election to our board, determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 4.9% will be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote. • We have substantial latitude in issuing equity securities without unitholder approval. One 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 part- ner 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 opera- tions or financial condition and our ability to make cash distributions. Future sales of our common units, or the issuance of preferred units, debt securities or warrants, could cause the market price of our com- mon units to decline. The market price of our common units could decline due to sales of a large number of units, or the issuance of debt securities or warrants, in the market, including sales of units by our large unitholders or under our two registration statements on Form F-3 filed with the SEC dur- ing 2011 and 2012, or the perception that these sales could occur. These sales could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common units. To date, no securities have been offered under either Registration Statement on Form F-3. Please see “Item 4A: History and Development of the Part- nership” for a more detailed description of our two registration statements on Form F-3 filed with the SEC. 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 se- curities to Capital Maritime. To date we have issued 15,555,554 Class B units to certain investors which are convertible on a one for one ba- sis into common units under certain circumstances and have also issued 24,967,240 common units to holders of Crude Carriers’ shares, in a unit-for-share transaction consummated in September 2011 whereby Crude Carriers became a wholly owned subsidiary of ours. We have also issued common units in connection with the acquisition of certain of our vessels, either directly to Capital Maritime or through public offer- ings under our Form F-3 filed with the SEC, and we may make additional such issuances in the future. In addition, in August 2010, we is- sued a total of 795,200 restricted common units under our Omnibus Incentive Compensation Plan adopted in April 2008, as amended (the “Plan”). The issuance by us of additional units or other equity securities of equal or senior rank will have the following effects: • • our unitholders’ proportionate ownership interest in us will decrease; the amount of cash available for distribution on each unit may decrease; 34 ANNUAL REPORT 2012 • • the relative voting strength of each previously outstanding unit may be diminished; and the market price of the units may decline. 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 90% 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 com- mon 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. 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 (and the person who transacts business with us reasonably believes, based on the limited partner’s conduct, that the limited partner is a general partner). Our general partner generally has unlimited li- ability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the part- nership that are expressly made without recourse to our general partner. In addition, the limitations on the liability of holders of limited part- ner 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” in our Registration Statement on Form F-1 filed with the SEC on March 19, 2007, for a more detailed 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 allows 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 borrow- ings by us to make distributions will reduce the amount of working capital borrowings we can make for operating our business. For more in- formation, please read “Item 5B: 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 rel- atively 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 Is- lands Limited Partnership Act (the “MILPA”), we may not make a distribution to you if the distribution would cause our liabilities (other than liabilities to partners on account of their partnership interest and liabilities for which the recourse of creditors is limited to specified proper- ty of ours) to exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in our assets only to the extent that the fair value of that property exceeds that liability. The MILPA pro- vides 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 the MILPA 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. We have incurred, and may continue to incur significant costs in complying with the requirements of the U.S. Sarbanes-Oxley Act of 2002. If management is unable to continue to provide reports as to the effectiveness of our internal control over financial reporting or our in- dependent registered public accounting firm is unable to continue to provide us with unqualified attestation reports as to the effective- ness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common units. We completed our IPO on the Nasdaq Global Market on April 3, 2007. As a publicly traded limited partnership, we are required to com- ply with the SEC’s reporting requirements and with corporate governance and related requirements of the U.S. Sarbanes-Oxley Act of 2002, the SEC and the Nasdaq Global Market, on which our common units are listed. Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (“SOX 35 ANNUAL REPORT 2012 404”) requires that we evaluate and determine the effectiveness of our internal control over financial reporting on an annual basis and include in our reports filed with the SEC our management’s assessment of the effectiveness of our internal control over financial reporting and a re- lated attestation of our independent registered public accounting firm. As our manager, Capital Maritime provides substantially all of our fi- nancial reporting, and we depend on the procedures they have in place. If, in such future annual reports on Form 20-F, our management can- not provide a report as to the effectiveness of our internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified attestation report as to the effectiveness of our internal control over financial reporting as re- quired by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common units. We have and expect we will continue to have to dedicate a significant amount of time and resources to ensure compliance with the reg- ulatory requirements of SOX 404. We will continue to work with our legal, accounting and financial advisors to identify any areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. However, these and other measures we may take may not be sufficient to allow us to satisfy our obligations as a public company on a time- ly and reliable basis. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely ba- sis and our financial statements may be materially misstated. We have incurred and will continue to incur legal, accounting and other expenses in complying with these and other applicable regulations. We anticipate that our incremental general and administrative expenses as a pub- licly 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. Our organization as a limited partnership under the laws of the Republic of The Marshall Islands may limit the ability of our unithold- ers to protect their interests. Our affairs are governed by our partnership agreement and the MILPA. The provisions of the MILPA resemble provisions of the limited partnership laws of a number of states in the United States, most notably Delaware. The MILPA also provides that it is to be applied and con- strued to make it uniform with the laws of the State of Delaware and, so long as it does not conflict with the MILPA or decisions of the Mar- shall Islands courts, interpreted according to the non-statutory law (or case law) of the State of Delaware. However, there have been few, if any, judicial cases in the Republic of The Marshall Islands interpreting the MILPA. For example, the rights and fiduciary responsibilities of directors under the laws of the Republic of The Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Although the MILPA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware, our public unitholders may have more difficulty in protecting their interests in the face of actions by management, directors or controlling unitholders than would unitholders of a limited partnership organized in a U.S. jurisdiction. It may not be possible for investors to enforce U.S. judgments against us. We are organized under the laws of the Republic of The Marshall Islands, as is our general partner, and most of our subsidiaries. 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 Unit- ed States. Substantially all of our assets and those of our subsidiaries are located outside the United States. As a result, it may be difficult or impossible for U.S. investors to serve process within the United States upon us or to enforce judgment upon us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or organized or where our as- sets or the assets of our subsidiaries are located (1) would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or (2) would impose, in original actions, liabili- ties against us or our subsidiaries based upon these laws. TAX RISKS In addition to the following risk factors, you should read “Item 10E: Taxation” below for a more complete discussion of the expected ma- terial 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 conse- quences to U.S. unitholders. A foreign entity taxed as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes if (x) at least 75% of its gross income for any taxable year consists of certain types of “pas- sive income”, or (y) at least 50% 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, 36 ANNUAL REPORT 2012 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. persons who own shares 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 believe that we are not currently a PFIC and we do not expect to become a PFIC in the future. We intend to treat our income from spot and 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”) or a United States court will accept this position, and there is accordingly a risk that the IRS or a United States court could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in our assets, income or operations. See “Item 10E: Taxation—PFIC Status and Significant Tax Consequences”. 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 either begins or ends, but that does not both 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, un- less 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-The Section 883 Exemption”. 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 le- gal authorities that do not expressly contemplate an organizational structure such as ours. Although we have elected to be treated as a corpo- ration for U.S. federal income tax purposes, for corporate law purposes we are organized as a limited partnership under Marshall Islands law. Our general partner will be responsible for managing our business and affairs and has been granted certain veto rights over decisions of our board of directors. Therefore, we can give no assurances that the IRS will not take a different position regarding our qualification, or the qual- ification 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 tax- es to those countries. We intend that our affairs and the business of each of our subsidiaries will be conducted and operated in a manner that minimizes income taxes imposed upon us and these subsidiaries or 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 own- ing 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 pay tax in that country based on your allocable share of our income. We may be re- quired to reduce distributions to you on account of any withholding obligations imposed upon us by that country in respect of such alloca- tion 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 acquiring, holding, disposing of or participating in the redemption of our units. However, the question of whether either we or any of our subsidiaries will be treated as carrying on business in any country, including Greece, will largely be a question of fact determined through an analysis of contractual arrangements, including the management and the administrative services agreements we have entered 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 carry- ing 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. 37 ANNUAL REPORT 2012 Item 4. Information on the Partnership. A. History and Development of the Partnership We are a master limited partnership formed as Capital Product Partners L.P. under the laws of the Marshall Islands on January 16, 2007. We completed our IPO in April 2007 at which time our fleet consisted of eight vessels as compared to the 25 currently in our fleet. We main- tain our principal executive headquarters at 3 Iassonos Street, Piraeus, 18537 Greece and our telephone number is +30 210 4584 950. On February 23, 2010, we announced the issuance of 5,800,000 common units at a public offering price of $8.85 per common unit un- der our Registration Statement on Form F-3 dated August 29, 2008, as amended (the “2008 Form F-3”). An additional 481,578 common units were subsequently sold on the same terms following the partial exercise of the over-allotment option granted to the underwriters for the offering. Capital GP L.L.C., our general partner, participated in both the offering and the exercise of the over-allotment option and pur- chased an additional 128,195 units at the public offering price, thereby maintaining its 2% interest us. Aggregate proceeds, net of commis- sions but before expenses relating to the offering, were approximately $54.0 million. The net proceeds from the offering were used to ac- quire one MR tanker at an acquisition price of $43.0 million and for general partnership purposes. On July 22, 2010, we held our annual general meeting of unitholders, at which time the two initial directors appointed by Capital Mar- itime and designated as Class III elected directors were re-elected by a majority of our common unitholders (excluding common units held by Capital Maritime). As of this annual meeting, a majority of our board is elected by our common unitholders, rather than appointed by our general partner. On August 9, 2010, we announced the issuance of 5,500,000 common units at a public offering price of $8.63 per common unit under our 2008 Form F-3. An additional 552,254 common units were subsequently sold on the same terms following the partial exercise of the over-allotment option granted to the underwriters. Capital GP LLC, our general partner, participated in both the offering and the exercise of the over-allotment option and purchased an additional 123,515 units at the public offering price, thereby maintaining its 2% interest in us. Aggregate proceeds, net of commissions but before expenses relating to the offering, were approximately $50.8 million. The net pro- ceeds from the offering were used to acquire one MR tanker at an acquisition price of $43.5 million and for general partnership purpos- es. On May 5, 2011, we entered into a definitive agreement to merge with Crude Carriers in a unit for share transaction whereby Crude Car- riers would become a wholly owned subsidiary of ours. The exchange ratio was 1.56 of our units for each Crude Carriers share. In Sep- tember 2011, we completed the merger with Crude Carriers, which was approved by 60.3% of Crude Carriers’ unaffiliated shareholders vot- ing as a separate class, representing approximately 97.9% of the total votes cast, at a special shareholders’ meeting. In connection with the merger, we issued an additional 24,967,240 common units to holders of Crude Carriers’ shares, which include 3,284,210 common units re- sulting from the conversion of Crude Carriers’ Class B Shares owned by Crude Carriers Investments and 623,064 common units resulting from the conversion of common shares issued under the Crude Carriers Equity Incentive Plan (the “Crude Plan”). We also approved the election of Dimitris Christacopoulos, an independent member of the Crude Carriers board, to our board of directors. Concurrently with the completion of the merger, and in order for our general partner to maintain its 2% interest in us, 499,346 common units owned by Capital Maritime were converted into general partner units. For additional information regarding the merger with Crude Carriers please see our Reg- istration Statement on Form F-4 filed with the SEC and declared effective on August 12, 2011 (our “Form F-4”) and Note 3 (Acquisitions) to our Financial Statements included herein. In June 2011, we completed the acquisition of the vessel owning company of the M/V Cape Agamemnon and the attached charter from Capital Maritime. The vessel is under a charter to Cosco, amended in November 2011, for a ten-year period which commenced in July 2010. The acquisition was funded through $1.5 million from available cash and the incurrence of $25.0 million of debt under our 2011 credit fa- cility and the remainder through the issuance of 6,958,000 common units to Capital Maritime. The acquisition was approved by our board of directors following approval by the conflicts committee. In June 2011, we entered into a new $25.0 million credit facility with Credit Agricole Emporiki Bank which, as subsequently amend- ed, is non-amortizing until March 2016 and is priced at LIBOR plus 3.25%. We used the full amount available under this facility in con- nection with the acquisition of the M/V Cape Agamemnon. Following certain prepayments, as of the date of this Annual Report $19.0 mil- lion were outstanding under the 2011 credit facility. In September 2011, we completed the refinancing of Crude Carriers’ outstanding debt of $134.6 million using our 2008 credit facility. The refinanced amount is non-amortizing until March 2016. 38 ANNUAL REPORT 2012 In September 2011, pursuant to the terms of our merger agreement with Crude Carriers, we amended and restated the omnibus agree- ment we had entered into at the time of our IPO with Capital Maritime. Under the terms of the amended and restated omnibus agreement Capital Maritime and its controlled affiliates (other than us, our general partner and our subsidiaries) have agreed not to acquire, own or op- erate product or crude oil tankers with carrying capacity over 30,000 dwt under time or bareboat charters with a remaining duration, ex- cluding any extension options, of at least twelve months at the earliest of the following dates: (a) the date the tanker to which such time or bareboat charter is attached is first acquired by Capital Maritime and its controlled affiliates and (b) the date on which a tanker owned by Capital Maritime or its controlled affiliates is put under such time or bareboat charter without the consent of our general partner or first of- fering such tanker vessel to us. Similarly, we may not acquire, own or operate product or crude oil tankers with carrying capacity under 30,000 dwt, other than vessels we had owned prior to the date of such restatement without first offering such tanker vessel first to Capital Maritime. In addition, both we and Capital Maritime have granted the other party a right of first offer on the transfer or re-chartering of any vessels with carrying capacity over 30,000 dwt. On December 9, 2011, our Registration Statement on Form F-3 filed with the SEC during 2011 using a “shelf” registration process, as amended, was declared effective (the “2011 Form F-3”). Under this 2011 Form F-3, we may sell, in one or more offerings, up to $500.0 million in total aggregate offering price of common units, preferred units, debt securities, including debt securities convertible into or ex- changeable for common units or other securities, and warrants. To date, no securities have been offered under the 2011 Form F-3. 2012 Developments Issuance and Sale of Class B Convertible Preferred Units In May 2012 we announced an agreement to issue $140.0 million of Class B Units to a group of investors including amongst others Kayne Anderson Capital Advisors, L.P., Swank Capital LLC, Salient Partners, Spring Creek Capital LLC, Mason Street Advisors LLC and our spon- sor Capital Maritime (the “Purchasers”). As of June 6, 2012, we had completed the issuance and sale of 15,555,554 Class B Units to the Purchasers pursuant to the Class B Convertible Preferred Unit Subscriptions Agreements dated May 11, 2012 and June 6, 2012 (the “Sub- scription Agreements”) entered into with the Purchasers. The Class B Units were priced at $9.00 per unit and are convertible at any time into common units of the Partnership on a one-for-one basis. The Class B Units pay a fixed quarterly distribution of $0.21375 per unit rep- resenting an annualized distribution yield of 9.5%. The net proceeds of the transaction, together with part of our cash balances, were used to prepay debt of $149.6 million across our three credit facilities. The transaction was unanimously approved by our board of directors. In connection with the issuance and sale of the Class B Units, we adopted the Second Amendment, dated as of May 22, 2012 (the “Sec- ond Amendment to the Partnership Agreement”), to our partnership agreement which establishes and sets forth the rights, preferences, priv- ileges, duties and obligations of the Class B Units. The issued Class B Units have certain rights that are senior to the rights of the holders of common units, such as the right to distributions and rights upon liquidation of the Partnership. Furthermore, we entered into the certain Registration Rights Agreements, dated as of May 22, 2012 and June 6, 2012 (“Registration Rights Agreements”), with certain Purchasers, relating to the registered resale of common units issuable upon the conversion of the Class B Units purchased pursuant to the Subscription Agreements. The Class B Units have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent a registration statement or exemption from registration. In addition, we also entered into amendments to our three credit facilities which provide for a deferral of scheduled amortization pay- ments under each of our three credit facilities until March 31, 2016, the conversion of the 2007 credit facility to a term loan and cancella- tion of the undrawn tranche of $52.5 million of our 2008 facility. In addition, the interest margin of our 2007 and 2008 facilities was in- creased to 2.0% and 3.0%, respectively. All other terms in these credit facilities remained unchanged. For additional information regarding the issuance and sale of the Class B Units, the Registration Rights Agreements, the Subscription Agreements and the Second Amendment to the Partnership Agreement please see our Current Reports on Form 6-K furnished to the SEC on May 23, 2012 and June 6, 2012 and Note 13 (Partners’ Capital/ Stockholders’ Equity) to our Financial Statements included herein. Other Developments During the first half of 2012 we sold the M/T Attikos and the M/T Aristofanis, the two small tankers in our fleet, to unrelated third par- ties. The proceeds from these sales plus cash were used to repay $20.5 million under our 2007 credit facility. On July 23, 2012, we held our annual general meeting of unitholders, at which time both Abel Rastershoff and Dimitris Christacopou- los were re-elected to act as Class II Directors until our 2015 annual general meeting. No other actions were taken at the meeting. 39 ANNUAL REPORT 2012 On November 8, 2012, our Registration Statement on Form F-3 filed with the SEC during 2012 using a “shelf” registration process, as amended, was declared effective (the “2012 Form F-3”). Under this 2012 Form F-3, the Purchasers may sell, in one or more offerings, the common units into which the Class B Units will convert on a one for one basis. To date, no securities have been offered under the 2012 Form F-3. On December 22, 2012, we acquired all of Capital Maritime’s interest in its wholly owned subsidiaries that owned the two 7,943 TEU container carrier vessels M/V Archimidis and M/V Agamemnon, both built at Daewoo Shipbuilding in South Korea and under medium term time charters with Maersk Line in exchange for all of our interest in our wholly owned subsidiaries that owned the two VLCCs M/T Alexan- der the Great and M/T Achilleas (the “2012 Vessel Sale”). Capital Maritime paid a total net consideration of $0.3 million in connection with this transaction and has waived any compensation for the early termination of the charters of the M/T Alexander the Great and M/T Achil- leas. In view of this transaction, we repaid $5.2 million in debt. The transaction was unanimously approved by our board of directors fol- lowing the recommendation of the conflicts committee of the board. Our fleet consists of 25 high specification vessels. We currently have no capital commitments to purchase or build additional vessels. We intend to continue to evaluate potential acquisitions of vessels or businesses and to take advantage of our relationship with Capital Mar- itime in a prudent manner that is accretive to our unitholders and to long-term distribution growth. Please see “—Our Fleet” below for more information regarding our vessels, their charters, charter rates and expirations, operating ex- penses and other information, “Item 5A: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Ac- counting for Acquisition and Disposal of Vessels and Merger with Crude Carriers Corp.” and “Item 5B: Liquidity and Capital Resources— Net Cash Provided by/(Used in) Investing Activities” for more information regarding any acquisitions and “Item 7B: Related-Party Trans- actions” for a description of the terms of certain transactions. B. Business Overview We are an international shipping company. Our fleet of 25 modern high specification vessels (1.8 million dwt) with an average age of approximately 5.8 years as of December 31, 2012., consists of four Suezmax crude oil tankers, 18 modern MR tankers all of which are classed as IMO II/III vessels, two postpanamax container carrier vessels and one Capesize bulk carrier. Our vessels are capable of carrying a wide range of cargoes, including crude oil, refined oil products, such as gasoline, diesel, fuel oil and jet fuel, edible oils and certain chemicals such as ethanol as well as dry cargo and containerized goods. As of December 31, 2012 all our vessels were chartered under medium to long-term time and bareboat charters (with an average remaining term of approximately 4.0 years) to large charterers such as BP Shipping Limited, Capital Maritime, Petrobras, Cosco, Maersk Line and subsidiaries of OSG. All our time and bareboat charters provide for the re- ceipt of a fixed base rate for the life of the charter, and in the case of 11 of our 17 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. As of December 31, 2012, the Marinakis family, including Evangelos M. Marinakis, our chairman, may be deemed to beneficially own a 30.3% interest in us through its beneficial ownership, amongst others, of Capital Maritime, and of Crude Carriers Investments. Business Strategies Our primary business objective is to pay a sustainable quarterly distribution per unit and to increase our distributions over time by ex- ecuting on the following business strategies: • Maintain medium to long-term fixed charters. We believe that the medium to long-term, fixed-rate nature of our charters, our prof- it sharing arrangements, and our cost-efficient ship management operations under our agreements with Capital Ship Management provide visibility of revenues and cash flows in the medium to long-term. As our vessels come up for rechartering we will seek to redeploy them under contracts that reflect our expectations of the market conditions prevailing at the time. We believe that the young age of our fleet the high specifications of our vessels and our manager’s ability to meet the rigorous vetting requirements of some of the world’s most selective major international oil companies position us well to recharter our vessels. • Expand our fleet through accretive acquisitions. Our fleet consists of 25 vessels, compared to eight vessels at the time of our IPO in 2007. We intend to continue to evaluate potential acquisitions of both newbuildings and second-hand vessels from Capital Mar- itime and third parties and to take advantage of our unique relationship with Capital Maritime to make strategic acquisitions in the medium to long-term in a prudent manner that is accretive to our unitholders and to long-term distribution growth. In addition, we may pursue opportunities for acquisitions of, or combinations with, other shipping businesses. • Capitalize on our relationship with Capital Maritime and expand our relationship with our existing and new charterers. We be- 40 ANNUAL REPORT 2012 lieve that we can leverage our relationship with Capital Maritime and its ability to meet the rigorous vetting processes of leading oil companies in order to attract new customers for the 22 tanker vessels in our fleet. We may increase the number of vessels we charter to our existing charterers, including Capital Maritime, in order to expand our relationship with them and satisfy their diverse trading requirements. In addition, we plan to enter into charter agreements with new customers in order to maintain a portfolio of charters that is diverse from a customer, geography and maturity perspective. • Maintain and build on our ability to meet rigorous industry and regulatory safety standards. We believe that in order for us to be successful in growing our business in the future, we will need to maintain our excellent vessel safety record and maintain and build on our high level of customer service and support. Capital Ship Management has an excellent vessel safety record, is capable of com- plying with rigorous health, safety and environmental protection standards, and is committed to providing our customers with a high level of customer service and support. Competitive Strengths We believe that we are well-positioned to execute our business strategies and our future prospects for success are enhanced because of the following competitive strengths: • Well established relationships with our counterparties and with Capital Maritime. We believe our strong relationships with our counterparties, many of which have chartered vessels since our IPO, and with Capital Maritime and its affiliates provide numerous benefits which are essential to our long-term growth and success. Capital Maritime has a well-established reputation within the ship- ping industry and strong relationships with many of the world’s leading oil companies, commodity traders and shipping companies. We also benefit from Capital Maritime’s expertise in technical fleet management and its ability to meet the rigorous vetting requirements of some of the world’s most selective major international oil companies, including BP p.l.c., Chevron Corporation, Phillips66 Inc., ExxonMobil Corporation, Royal Dutch Shell plc, Statoil ASA, Total S.A. and many others. Furthermore, we benefit from the di- verse trading requirements of Capital Maritime as well as the diversity of our fleet, which allow us to expand our chartering rela- tionships and enter into agreements with additional charterparties, including in the dry bulk and container markets. • Modern, high specification product tanker fleet. The 18 MR tankers that form part of our fleet of 25 modern high specification ves- sels are all classed as IMO II/III vessels, which, in addition to the Ice Class 1A classification notation of many of our vessels, the wide range in size and geographic flexibility of our fleet and compliance with existing and expected regulatory standards are attractive to our charterers, providing them with a high degree of flexibility in the types of cargoes and variety in the trade routes they may choose as they employ our fleet. In addition, we believe that these characteristics of our fleet position us well to take advantage of the positive demand fundamentals in the product tanker business as our vessels become available for rechartering. • Financial strength and flexibility. In connection with the issuance of and sale of the Class B Units in the second quarter of 2012 we decreased our debt by $149.6 million and executed amendments to our three credit facilities, providing, amongst others, for the de- ferral of scheduled amortization payments under each of the facilities until March 31, 2016. In addition, the completion of our merg- er with Crude Carriers in September 2011 strengthened our balance sheet by increasing our assets relative to our debt and thereby in- creasing our financial flexibility and laying a solid basis for potential future distribution growth. We believe that the strengthened bal- ance sheet and the terms of our amended credit facilities enhance our financial flexibility pay attractive distributions and to realize potential new vessel acquisitions from Capital Maritime and third parties. We also believe our financial strength positions us well to be a strong counterparty to our charterers as they seek financially sound counterparties to enter into long term contracts with. Our Customers We provide marine transportation services under medium to long-term time charters or bareboat charters with counterparties that we believe are creditworthy: • BP Shipping Limited, the shipping affiliate of BP p.l.c., one of the world’s largest producers of crude oil and natural gas. BP p.l.c. has exploration and production interests in over 20 countries. BP Shipping provides all logistics for the marketing of BP’s oil and gas cargoes. • Overseas Shipholding Group Inc. , one of the largest independent shipping companies in the world operating crude and product tankers with a fleet of over 100 owned and operated vessels. • Petroleo Brasileiro S.A. ( Petrobras ), the Brazilian state-run energy company, is an integrated oil and gas company with interests in exploration, production, refining, marketing and distribution. Petrobras also controls a fleet of over 50 vessels and is listed on the New York Stock Exchange. Petrobras is one of the world’s biggest companies in the world by market value. 41 ANNUAL REPORT 2012 • Arrendadora Ocean Mexicana S.A. de C.V., is a Mexican company specializing in the supply and operation of vessels for the off- shore oil and gas industry. • Capital Maritime & Trading Corp., an established shipping company with activities in the sea transportation of wet (crude oil, oil prod- ucts, chemicals) and dry cargos worldwide with a long history of operating and investing in the shipping markets. • SUBTEC S.A. de C.V, is a Mexican company specializing in the supply and operation of vessels for the offshore oil and gas industry. • Cosco Bulk Carrier Co. Ltd., is an affiliate of the COSCO Group which is one of the largest drybulk charterers globally. The COSCO Group, listed on the Hong Kong Stock Exchange is believed to be China’s largest group specializing in global shipping, modern lo- gistics and ship building and repairing. COSCO Group currently owns and controls over 800 modern merchant vessels with a total tonnage of 56 million dwt and an annual carrying capacity of 400 million tons. • Maersk Line is the global containerized division of A.P.Møller-Mærsk – Maersk Group, which is presently the world’s largest lin- er company with a fleet of more than 600 owned and operated vessels. For the year ended December 31, 2012, Capital Maritime and BP Shipping Limited accounted for 45% and 23% of our revenues, re- spectively. For the year ended December 31, 2011, Capital Maritime, BP Shipping Limited and subsidiaries of OSG accounted for 24%, 32% and 11% of our revenues, respectively. For the year ended December 31, 2010, BP Shipping Limited, Morgan Stanley Capital Group Inc. and subsidiaries of OSG accounted for 49%, 11% and 11% of our revenues, respectively. As of December 31, 2012, we had three IMO II/III Chemical/Product tankers (the M/T Alexandros II, the M/T Aristotelis II and the M/T Aris II) on long term bareboat charter to subsidiaries of OSG. These charters are scheduled to terminate, approximately, in February, July and September of 2018, respectively, and are at rates that are substantially above current market rates. On November 14, 2012, OSG made a voluntary filing for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. OSG has requested that we reduce the charter rates for their remaining terms to substantially lower rates. We have been in discussions with OSG regarding this matter. No assurance can be given that we will reach an agreement with OSG regarding the remaining duration, rate and terms of the charters or, our rights in the bankruptcy proceedings, or, if such an agreement is reached, that it will be approved by bankruptcy court. 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 Management Agreements We have entered into three separate technical and commercial management agreements with Capital Ship Management, a subsidiary of Capital Maritime, for the management of our fleet. Each vessel in our fleet is managed under the terms of one of the following three agree- ments: • • Fixed fee management agreement: At the time of our IPO we entered into an agreement with our manager, according to which our manager provides us with certain commercial and technical management services for a fixed daily fee per managed vessel which covers the commercial and technical management services, the respective vessels’ operating costs such as crewing, repairs and main- tenance, insurance, stores, spares, and lubricants as well as the cost of the first special survey or next scheduled drydocking, of each vessel. In addition to the fixed daily fees payable under the management agreement, Capital Ship Management is entitled to sup- plementary compensation for Extraordinary Fees and Costs (as defined in the agreement) of any additional direct and indirect ex- penses it reasonably incurs in providing these services, which may vary from time to time. We also pay a fixed daily fee per bare- boat chartered vessel in our fleet, mainly to cover compliance and commercial costs, which include those costs incurred by our man- ager to remain in compliance with the oil majors’ requirements, including vetting requirements. Floating fee management agreement: In June 2011, we entered into an agreement with our manager based on actual expenses with an initial term of five years per managed vessel. Under the terms of this agreement we compensate our manager for expenses and liabilities incurred on our behalf while providing the agreed services to us, including, but not limited to, crew, repairs and mainte- nance, insurance, stores, spares, lubricants and other operating costs. Costs and expenses associated with a managed vessel’s next scheduled drydocking are borne by us and not by our manager. We also pay our manager a daily technical management fee per man- aged vessel that is revised annually based on the United States Consumer Price Index. • Crude Carriers management agreement: In September 2011, we completed our merger with Crude Carriers. The five crude tanker vessels we acquired as part of the merger continue to be managed under a management agreement entered into in March 2010, as amended, with Capital Ship Management whose initial term expires on December 31, 2020. Under the terms of this agreement we compensate our manager for all of its expenses and liabilities incurred on our behalf while providing the agreed services to us, in- cluding, but not limited to, crew, repairs and maintenance, insurance, stores, spares, lubricants and other operating and administra- 42 ANNUAL REPORT 2012 tive costs. We also pay our manager the following fees (a) a daily technical management fee per managed vessel that is revised an- nually based on the United States Consumer Price Index; (b) a sale & purchase fee equal to 1% of the gross purchase or sale price upon the consummation of any purchase or sale of a vessel acquired by Crude Carriers; and (c) a commercial services fee equal to 1.25% of all gross charter revenues generated by each vessel for commercial services rendered. The manager has the right to ter- minate the Crude Carriers management agreement and, under certain circumstances, could receive substantial sums in connection with such termination; however, even if our board of directors or our unitholders are dissatisfied with the manager, there are limit- ed circumstances under which we can terminate this management agreement. This termination fee was initially set at $9.0 million in March 2010 and increases on each one-year anniversary during which the management agreement remains in effect (on a com- pounding basis) in accordance with the total percentage increase, if any, in the Consumer Price Index over the immediately preced- ing twelve months. As of March 2012 this termination fee had been adjusted to $9.5 million. We expect that as the fixed fee management agreement expires for certain of our vessels, such vessels, and any additional acquisitions we make in the future, shall be managed under the floating fee management agreement. Under the terms of all three agreements, 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. The table below sets out, as of December 31, 2012 the management agreement under which each vessel in our fleet is managed. Vessel Name Fixed fee management agreement Floating fee management agreement Crude management agreement M/T Atlantas (M/T British Ensign) M/T Assos (M/T Insurgentes) M/T Aktoras (M/T British Envoy) M/T Agisilaos M/T Arionas M/T Avax M/T Aiolos (M/T British Emissary) M/T Axios M/T Atrotos (M/T El Pipila) M/T Akeraios M/T Apostolos M/T Anemos I M/T Alexandros II (M/T Overseas Serifos) M/T Amore Mio II M/T Aristotelis II (M/T Overseas Sifnos) M/T Aris II (M/T Overseas Kimolos) M/T Agamemnon II M/T Ayrton II M/T Alkiviadis M/V Cape Agamemnon M/T Miltiadis M II M/T Amoureux M/T Aias M/V Agamemnon M/V Archimidis Our Fleet X X X until Dec 4, 2011 until Aug 3, 2011 until Apr 17, 2012 X until Jun 12, 2012 X until Aug 25, 2012 until Sept 14, 2012 until Dec 23, 2012 X X X X X X X - - - - - - - - - as of Dec 5, 2011 as of Aug 4, 2011 as of Apr 18, 2012 - as of Jun 13, 2012 - as of Aug 26, 2012 as of Sep 15, 2012 as of Dec 24, 2012 - - - - - - - as of Jun 10, 2011 - - - as of Dec 22, 2012 as of Dec 22, 2012 - - - - - - - - - - - - - - - - - - - - as of Sep 30, 2011 as of Sep 30, 2011 as of Sep 30, 2011 - - 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 25 vessels of various sizes with an average age of ap- proximately 5.8 years and average remaining term under our charters of approximately 4.0 years (as of December 31, 2012). We intend to continue to take advantage of our unique relationship with Capital Maritime and, subject to prevailing shipping, charter 43 ANNUAL REPORT 2012 and financial market conditions and the approval of our board of directors, make strategic acquisitions in the medium to long term in a pru- dent manner that is accretive to our unitholders and to long-term distribution growth. In addition, we may pursue opportunities for acqui- sitions of, or combinations with, other shipping businesses. Pursuant to the amended and restated omnibus agreement we have entered into with Capital Maritime pursuant to our merger with Crude Carriers, Capital Maritime has granted us a right of first offer for any product or crude oil tankers in its fleet with carrying capacity over 30,000 dwt under time or bareboat charter with a remaining duration of at least twelve months. Capital Maritime is, however, under no obligation to fix any of these vessels under charters of longer than twelve months. Please read “Item 7B: Related-Party Transactions” for a detailed description of our amended and restated omnibus agreement with Capital Mar- itime. The table below provides summary information as of December 31, 2012 about the vessels in our fleet, as well as their delivery date or expected delivery date to us and their employment, including earliest possible redelivery dates of the vessels and relevant charter rates. The table also includes the daily management fee and approximate expected termination date of the respective management agreement with Capital Ship Management with respect to each vessel. Sister vessels, which are vessels of similar specifications and size typically built at the same shipyard, are denoted by the same letter in the table. We believe that sister vessels provide a number of efficiency advantages in the management of our fleet. All of the vessels in our fleet are or were designed, constructed, inspected and tested in accordance with the rules and regulations of Det Norske Veritas (“DNV”), Lloyd’s Register of Shipping (“Lloyd’s”), Bureau Veritas (“BV”) or the American Bureau of Shipping (“ABS”) and were under time or bareboat charters from the time of their delivery. 44 ANNUAL REPORT 2012 VESSELS IN OUR FLEET AS OF DECEMBER 31, 2012 Vessel name Sister Year Vessels1 built DWT OPEX (per day)2 Management Agreement Expiration Charter Duration/ Type3 Expiry of Charter4 Daily Charter Rate (Net) Profit Charterer6 Share5 Description PRODUCT TANKERS Atlantas7 Aktoras7 Aiolos7 Agisilaos Arionas Axios Avax Akeraios Anemos I Apostolos Alexandros II8 Aristotelis II 8 Aris II7 Agamemnon II9 Ayrton II9 Atrotos9,11 Alkiviadis Assos9,11 CRUDE TANKERS Amoureux Aias Amore Mio II Miltiadis M II14 DRYBULK VESSEL Cape Agamemnon CONTAINER CARRIER VESSELS Archimidis15 Agamemnon15 A A A A A B B B B B C C C C C B A B D D E F G H H 2006 2006 2007 2006 2006 2007 2007 2007 2007 2007 36,760 36,759 36,725 36,760 36,725 47,872 47,834 47,781 47,782 47,782 $500 $500 $500 Floating Floating Floating Floating Floating Floating Floating Mar 2016 Mar 2016 Jan 2017 Dec 2016 Aug 2016 Jun 2017 Apr 2017 Aug 2017 Dec 2017 Sep 2017 8-yr BC 8-yr BC 8-yr BC 1-yr TC 1-yr TC 1-yr TC 1-yr TC 1-yr TC 3-yr TC 1-yr TC Mar 2014 Jun 2014 Feb 2015 Jul 2013 Sep 2013 May 2013 Apr 2013 Jun 2013 Aug 2013 Aug 2013 $13,433 $13,433 $13,433 $13,331 $13,628 $13,825 $13,825 $13,825 $14,259 $13,825 2008 51,258 $250 Dec 2012-Mar 2013 10-yr BC Dec 2017 $13,000 2008 2008 2008 2009 2007 2006 2006 51,226 51,218 51,238 51,260 47,786 36,721 47,872 $250 $250 $6,500 $6,500 $500 $7,000 $500 Mar-Jun 2013 May-Aug 2013 Oct 2013 Mar 2014 Mar 2014 5- Jun 2015 Mar 2014 10-yr BC 10-yr BC 1-yr TC 2-yr TC yr BC 1-yr TC 5-yr BC May 2018 Jul 2018 Feb 2013 Mar 2014 Mar 2014 Jun 2013 Mar 2014 $13,000 $13,000 $14,000 $15,000 $16,825 $13,250 $16,825 2008 149,993 2008 150,393 2001 159,982 Crude Crude $8,500 Dec 2020 Dec 2020 Mar-Apr 2013 3-yr TC 3-yr TC 1-yr TC Nov 2014 Nov 2014 Nov 2013 $23,700 $23,700 $17,281 2006 162,397 Crude Dec 2020 2-yr TC Sep 2014 - ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ BP BP BP CMTC CMTC CMTC CMTC CMTC PTRB CMTC OSG OSG OSG BP BP ARR CMTC ARR CMTC CMTC BP SUBT Ice Class 1A IMO II/III Chemical/ Product IMO II/III Chem./Prod. IMO II/III Chem./Prod. Ice Class 1A IMO II/III Chem./Prod. Suezmax Ice Class 1A Suezmax 2010 179,221 Floating Jun-2016 10-yr TC Jun 2020 $40,090 COSCO 2006 103,773 Floating 2007 103,773 Floating Dec 2017 Dec 2017 3-yr TC 3-yr TC Nov 2015 Aug 2015 $33,150 $33,150 MAERSK MAERSK Post-Panamax TOTAL FLEET DWT: 1,820,891 1 Sister vessels are denoted in the tables by the same letter as follows: (A), (B): these vessels were built by Hyundai MIPO Dockyard Co., Ltd., South Korea, , (C): these vessels were built by STX Shipbuilding Co., Ltd., South Korea, (D): these vessels were built by Universal Shipbuilding Corp., Ariake, Japan (E),(F), (H): these vessels were built by Daewoo Shipbuilding and Marine Engi- neering Co., Ltd., South Korea. (G) This vessel was built by Sungdong Shipbuilding & Marine Engineering Co., Ltd., South Ko- rea. 2 Floating: These vessels are managed under the floating fee management agreement entered into with our manager. Crude: These vessels managed under the Crude management agreement entered into between Crude and our manager. The remaining vessels are managed under the fixed fee management agreement entered into with our manager. For additional details regarding our manage- ment agreements please see “—Management Agreements” above. 3 TC: Time Charter, BC: Bareboat Charter 4 Earliest possible redelivery date. For product tankers the redelivery date is +/–30 days at the charterer’s option. For crude tankers under charter with CMTC, the expiry of the charter assumes the exercise by CMTC of its option to extend the charter (+/- 30 days) at revised rates (See Footnote 15 below for additional information). 45 ANNUAL REPORT 2012 5 Product Tankers: 50/50 profit share element for all vessels applies only to voyages that breach Institute Warranty Limits (“IWL”). The amounts received under these profit-sharing arrangements are subject to the same commissions payable on the gross charter rates, if any. Crude Tankers 50/50 profit share on actual earnings settled every 6 months for the first 12 months of the TC. 6 BP: BP Shipping Limited, or, in the case of the M/T Amore Mio II, BP Singapore Pte Ltd. OSG: certain subsidiaries of Overseas Shipholding Group, Inc. CMTC: Capital Maritime & Trading Corp. (our Sponsor). PTRB: Petroleo Brasileiro S.A. (Petrobras). ARR: Arrendadora Ocean Mexicana, S.A. de C.V. SUBT: Subtec S.A. de C.V. COSCO: Cosco Bulk Carrier Co. Ltd., an affiliate of the COSCO Group. MAERSK: A.P. Moller-Maersk A.S. 7 For the duration of the BC these vessels have been renamed British Ensign, British Envoy and British Emissary, respectively. 8 For the duration of the BC these vessels have been renamed: Overseas Serifos, Overseas Sifnos and Overseas Kimolos. OSG has an option to purchase each vessel at the end of the eighth, ninth or tenth year of its charter for $38.0 million, $35.5 million and $33.0 mil- lion, respectively, which option is exercisable six months before the date of completion of the relevant year of the charter. The ex- piration date above may therefore change depending on whether the charterer exercises its purchase option. On November 14, 2012, OSG made a voluntary filing for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Dis- trict of Delaware. OSG has requested that we reduce the charter rates for their remaining terms to substantially lower rates and we are in discussions with OSG regarding this matter. 9 The M/T Agamemnon II and the M/T Ayrton II were acquired in exchange for the M/T Assos (which was part of our fleet at the time of the IPO) and the M/T Atrotos (which was acquired from Capital Maritime in May 2007) on April 7 and April 13, 2009, re- spectively. We subsequently re-acquired the M/T Atrotos and the M/T Assos from Capital Maritime in February and August 2010, respectively. Capital Maritime had granted us an offer to acquire all four vessels under the terms of the omnibus agreement. 10 Net rate for the second 12 month period under the charter commencing in April 2013. For the first 12 month period of the charter, which expires in April 2013, the net rate is $14,000 per day. 11 For the duration of the BC these vessels have been renamed M/T El Pipila and M/T Insurgentes. ARR has subsequently delivered these vessels to the state-owned Mexican petroleum company Petroleos Mexicanos (“Pemex”). 12 CMTC has the option to extend the TC for a third year at $27,650 net per day with the same profit share arrangements. 13 For the period from January to March 2013 the net rate for this charter is $16,935. BP has been granted an additional 3-month op- tion declarable by September 2013. 14 SUBT has subsequently delivered this vessel to PEMEX. 15 Maersk Line has the option to extend the charter for an additional four years at a net day rate of $30,712 and $29,737 per day, re- spectively, for the fourth and fifth year and $31,200 per day for the final two years. If all options were to be exercised, the employment of the vessels would extend to December 2019 for the M/V Archimidis and July 2019 for the M/V Agamemnon. Comparison of Possible Excess of Carrying Value Over Estimated Charter-Free Market Value of Certain Vessels In “Critical Accounting Policies —Vessel lives and impairment” in Item 5 below, we discuss our policy for impairing the carrying values of our vessels. During the past few years, the market values of vessels have experienced particular volatility, with substantial declines in many vessel classes. As a result, the charter-free market value, or basic market value, of certain of our vessels may have declined below those vessels’ carrying value, even though we would not impair those vessels’ carrying value under our accounting im- pairment policy, due to our belief that future undiscounted cash flows expected to be earned by such vessels over their operating lives would exceed such vessels’ carrying amounts. The table set forth below indicates (i) the carrying value of each of our vessels as of December 31, 2012, (ii) which of our vessels we believe has a basic market value below its carrying value, and (iii) the aggregate difference between carrying value and market val- ue represented by such vessels. This aggregate difference represents the approximate analysis of the amount by which we believe we would have to reduce our net income if we sold all of such vessels in the current environment, on industry standard terms, in cash trans- actions, and to a willing buyer where we are not under any compulsion to sell, and where the buyer is not under any compulsion to buy. For purposes of this calculation, we have assumed that the vessels would be sold at a price that reflects our estimate of their cur- rent basic market values. Our estimates of basic market value assume that our vessels are all in good and seaworthy condition without need for repair and, if inspected, would be certified in class without notations of any kind. Our estimates are based on the average of two estimated mar- ket values for our vessels received from third party independent shipbrokers approved by our banks. In addition, vessel values are high- ly volatile; as such, our estimates may not be indicative of the current or future basic market value of our vessels or prices that we could achieve if we were to sell them. 46 VESSELS M/T Atlantas M/T Assos M/T Aktoras M/T Agisilaos M/T Arionas M/T Avax M/T Aiolos M/T Axios M/T Atrotos M/T Akeraios M/T Apostolos M/T Anemos I M/T Attikos (1) M/T Alexandros II M/T Amore Mio II M/T Aristofanis (1) M/T Aristotelis II M/T Aris II M/T Agamemnon II M/T Ayrton II M/T Alkiviadis M/V Cape Agamemnon M/T Alexander the Great (2) M/T Achilleas (2) M/T Miltiadis M II M/T Amoureux M/T Aias M/V Archimidis (2) M/V Agamemnon (2) Total DATE ACQUIRED BY US 04/04/2007 04/04/2007 & 08/16/2010 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 05/08/2007 & 03/01/2010 07/13/2007 09/20/2007 09/28/2007 09/24/2007 01/29/2008 03/27/2008 04/30/2008 06/17/2008 08/20/2008 04/07/2009 04/13/2009 06/30/2010 06/09/2011 09/30/2011 09/30/2011 09/30/2011 09/30/2011 09/30/2011 12/22/2012 12/22/2012 ANNUAL REPORT 2012 CARRYING VALUE AS AT DECEMBER 31,2012 (IN MILLION OF UNITED STATES DOLLARS) $24.3* $30.8* $24.7* $25.3* $25.5* $28.5* $25.5* $28.9* $29.4* $29.4* $32.7* $32.7* - $38.1* $64.5* - $38.6* $38.8* $40.5* $40.1* $27.2* $48.5* - - $50.2* $51.3* $51.3* $64.9 $67.9 $959.6 CARRYING VALUE AS AT DECEMBER 31,2011 (IN MILLION OF UNITED STATES DOLLARS) $25.5 $32.3* $25.9 $26.5 $26.8 $29.9 $26.7 $30.3 $30.9 $30.8 $34.3* $34.3* $8.9 $39.9* $69.0* $9.6 $40.4* $40.6* $42.3* $41.9* $28.6* $50.4* $94.1* $94.1* $52.6* $53.7* $53.7* - - $1,074 (1) During 2012 we sold the M/T Attikos and the M/T Aristofanis, to unrelated third parties. (2) On December 22, 2012, we acquired the shares of the vessel owning companies of the M/V Agamemnon and the M/V Archimidis from Cap- ital Maritime in exchange for the shares of the vessel owning companies of the M/T Achilleas and the M/T Alexander The Great, respectively. *Indicates vessels, for which we believe, as of December 31, 2012, the basic charter-free market value is lower than the vessel’s carry- ing value as of December 31, 2012 and 2011. We believe that the aggregate carrying value of these vessels, assessed separately, exceeds their aggregate basic charter-free market value by approximately $173.5 and $92.7 million as of December 31, 2012 and 2011 respective- ly. This increase of $80.8 million in 2012 as compared to 2011 is due to the deterioration of asset values in bulk carriers and tankers as a consequence of economical slowdown. As discussed in “Critical Accounting Policies—Vessel lives and impairment” below, we believe that the carrying values of our vessels as of December 31, 2012 and 2011, were recoverable as the undiscounted projected net operating cash flows of these vessels exceeded their carrying value by a significant amount. Our Charters As of December 31, 2012, all the vessels in our fleet were under medium to long-term time or bareboat charters with an average remaining term under our charters of approximately 4.0 years . Under certain circumstances, we may operate our vessels in the spot market until they are fixed under appropriate medium to long-term charters. As our vessels come up for rechartering, depending on the prevailing market rates, we may not be able to recharter them at levels similar to their current charters which may affect our future cash flows from operations. Please read “—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. 47 ANNUAL REPORT 2012 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 charter- er is responsible for substantially all vessel voyage costs except for commissions which are assumed by the owner. 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 17 vessels under time charter agreements of which 11 contain profit-sharing provisions that allow us to realize at a pre-de- termined percentage additional revenues when spot rates or actual charter 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 The profit sharing arrangements for our product tanker vessels under time charter with BP Shipping Limited and Capital Maritime are based on the calculation of the time charter equivalent (“TCE”) according to the “last to next” principle and are only applicable to voyages during which Institute Warranty Limits (“IWL”) have been breached. In such event, we receive the basic net hire rate plus 50% of the ex- cess over the gross hire rate. This means that actual voyage revenues earned and received, actual expenses incurred and actual time taken to perform the voyage are used for the purpose of the calculation. The charterer is obliged to provide us with a copy of each fixture note and all reasonable documentation with respect to items of cost and earnings referring to each voyage during which IWL have been breached. 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 for any voyage where IWL have been breached exceeds the basic gross hire rate, then we receive the basic net hire rate plus 50% of the excess over the gross hire rate. The profit share with both Capital Maritime and BP Shipping Limited, if any, is calculated and settled the next calendar month following the completion of the voyage. The profit sharing arrangements for our two crude tanker vessels under time charter with Capital Maritime are based on the calculation of the vessels’ actual earnings and are settled every 6 months. In the event actual TCE over that period is higher than the agreed daily char- ter rate of the vessel, we receive the basic net hire rate plus 50% of the excess over the gross daily charter rate. This means that actual voy- age revenues earned and received, actual expenses incurred and actual time taken to perform the voyages during that period 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. The amounts received under these profit-sharing arrangements are subject to the same commissions payable on the gross charter rates. Please read “—Our Fleet” above, including the chart and accompanying notes, for additional information. 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 ex- pressed 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 commis- sions. The customer undertakes to maintain the vessel in a good state of repair and efficient operating condition and drydock the vessel dur- ing 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. As of December 31, 2012 we had eight vessels under bareboat charter, three with BP Shipping Limited, three with subsidiaries of OSG and two with Arrendadora. The charters entered into with subsidiaries of OSG are fully and unconditionally guaranteed by Overseas Shiphold- ing 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 pri- or to the end of the charter year. On November 14, 2012, OSG made a voluntary filing for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. OSG has requested that we reduce the charter rates for their remaining terms to substantially lower rates. We have been in discussions with OSG regarding this matter. No assurance can be given that we will reach an agreement with OSG regarding the remaining duration, rate and terms of the charters or, our rights in the bankruptcy proceedings, or, if such an agreement is reached, that it will be approved by bankruptcy court. 48 ANNUAL REPORT 2012 Spot Charters A spot charter generally refers to a voyage charter or a trip charter or a short term time charter. Voyage / Trip Charter A voyage charter involves the carriage of a specific amount and type of cargo on a load port-to-discharge port basis, subject to var- ious cargo handling terms. Under a typical voyage charter, the shipowner is paid on the basis of moving cargo from a loading port to a discharge port. In voyage charters the shipowner generally is responsible for paying both vessel operating costs and voyage expenses, and the charterer generally is responsible for any delay at the loading or discharging ports. Under a typical trip charter or short term time charter, the shipowner is paid on the basis of moving cargo from a loading port to a discharge port at a set daily rate. The charterer is re- sponsible for paying for bunkers and other voyage expenses, while the shipowner is responsible for paying vessel operating expenses. Seasonality Our vessels operate under medium to long-term charters and are not generally subject to the effect of seasonable variations in de- mand. Management of Ship Operations, Administration and Safety Capital Maritime, through its subsidiary Capital Ship Management, provides expertise in various functions critical to our opera- tions. This enables a safe, efficient and cost-effective operation and, pursuant to the management and administrative services agree- ments we have entered into with Capital Ship Management, grants us access to human resources, financial and other administrative services, including bookkeeping, audit and accounting services, administrative and clerical services, banking and financial services, client, investor relations, information technology and technical management services, including commercial management of the ves- sels, vessel maintenance and crewing (not required for vessels subject to bareboat charters), purchasing, insurance and shipyard su- pervision. We have entered into three separate technical and commercial management agreements with Capital Ship Management for the man- agement of our fleet: the fixed fee management agreement, the floating fee management agreement and, with respect to the vessels ac- quired as part of the merger with Crude Carriers, the Crude Carriers management agreement. Each vessel in our fleet is managed under the terms of one of these three agreements. The aggregate management fees paid to Capital Ship Management for the year ended De- cember 31, 2012, was $23.6 million as compared to $30.5 million for the year ended December 31, 2011. For a more detailed description of the three management agreements and administrative services agreements we have entered into with Capital Ship Management please read “—Our Management Agreements” above, and “Item 7B: Related-Party Transactions—Trans- actions entered into during the year ended December 31, 2012” and “—Transactions entered into during the year ended December 31, 2011” below. Capital Ship Management operates under a safety management system in compliance with the IMO’s ISM code and certified by Lloyds Register. Capital Ship Management’s management systems also comply with the Quality Assurance Standard ISO 9001, the Environ- mental Management Standard ISO 14001, the Occupational Health & Safety Management System (“OHSAS”) 18001 and the Energy Management Standard 50001, all of which are certified by Lloyd’s Register of Shipping. Capital Ship Management recently implemented an “Integrated Management System Certification” approved by the Lloyd’s Register Group and also adopted “Business Continuity Man- agement” principles in cooperation with Lloyd’s Register Group. 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 man- ages 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 regulat- ed. Many international and national rules, regulations and other requirements – whether imposed by the classification societies, inter- national 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. 49 ANNUAL REPORT 2012 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 BP p.l.c., Chevron Corporation, Philips66 Inc., ExxonMobil Corporation, Royal Dutch Shell plc, Statoil ASA, and Total S.A., together with a few smaller companies, represent a significant percentage of the production, trad- ing 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 associa- tion, the Oil Companies International Marine Forum (“OCIMF”), have developed and are implementing two basic tools: (i) a Ship In- spection Report Programme (“SIRE”) and (ii) the Tanker Management & Self Assessment (“TMSA”) Program. The former is a physi- cal 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 char- ter, which will clear the vessel for use for an extended period of time. The depth, complexity and difficulty of each of these levels of as- sessment 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 commer- cial 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 un- dergone and successfully completed audits by seven major international oil companies in the last few years (i.e., BP p.l.c., Chevron Cor- poration, Philips66 Inc., ExxonMobil Corporation, Royal Dutch Shell plc, Statoil ASA and Total S.A.). Crewing and Staff Capital Ship Management, an affiliate of Capital Maritime, through a subsidiary in Romania and crewing offices in Romania, Rus- sia and the Philippines recruits senior officers and crews for our vessels. Capital Ship Management also maintains a presence in the Philip- pines 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 em- ployed 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 ver- ifying 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 under- take 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 coun- try concerned. For the maintenance of the class certificate, regular and extraordinary surveys of hull and machinery, including the electrical plant, and any special equipment classed are required to be performed as follows: Annual Surveys, which are conducted for the hull and the machinery at intervals of 12 months from the date of commencement of the class period indicated on the certificate. Intermediate Surveys, which are extended annual surveys and are typically conducted two and one-half years after commissioning and after each class renewal survey. In the case of newbuildings, the requirements of the intermediate survey can be met through an un- derwater inspection in lieu of drydocking the vessel. Intermediate surveys may be carried out on the occasion of the second or third an- nual survey. 50 ANNUAL REPORT 2012 Class Renewal Surveys (also known as special surveys ), which are carried out at the intervals indicated by the classification for the hull (usually at five year intervals). During the special survey, the vessel is thoroughly examined, including Non-Destructive Inspections (“NDIs”) to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classi- fication society will order steel renewals. The classification society may grant a one-year grace period for completion of the special sur- vey. Substantial amounts of funds may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every five years, depending on whether a grace period is granted, a ship-owner or manager has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. At an owner’s application, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as ESP (Enhanced Sur- vey Program) and CSM (Continuous Machinery Survey). Occasional Surveys which are carried out as a result of unexpected events, e.g. an accident or other circumstances requiring unscheduled attendance by the classification society for re-confirming that the vessel maintains its class, following such an unexpected event. All areas subject to survey, as defined by the classification society, are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years. Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a ‘‘recommendation’’ which must be rectified by the ship-owner within prescribed time limits. Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society which is a member of the International Association of Classification Societies. All of our vessels are certified as being “in class” by Lloyd’s, ABS, BV and DNV. All new and secondhand vessels that we may purchase must be certified prior to their delivery under our standard agreements. If any vessel we contract to purchase is not certified as “in class” on the date of closing, we will have no obligation to take delivery of such vessel. Risk Management and Insurance The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters, death or personal injury and prop- erty 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, cata- strophic liabilities. Although we believe our current insurance program is comprehensive, we cannot insure against all risks, and we can- not be certain that all covered risks are adequately insured against or that we will be able to achieve or maintain similar levels of cov- erage throughout a vessel’s useful life. Furthermore, there can be no guarantee that any specific claim will be paid by the insurer or that it will always be possible to obtain insurance coverage at reasonable rates. More stringent environmental regulations at times in the past have resulted in increased costs for, and may result in the lack of availability of, insurance against the risks of environmental damage or pollution. Moreover, under the terms of our bareboat charters, the charterer provides for the insurance of the vessel, and as a result, these vessels may not be adequately insured and/or in some cases may be self-insured. Any uninsured or under-insured loss has the po- tential to harm our business and financial condition or could materially impair or end our ability to trade or operate. We believe our current insurance program is prudent. We currently carry the traditional range of main and liability insurance cov- erage for each of our vessels to protect against most of the accident-related risks involved in the conduct of our business. Specifically we carry: • • Hull and machinery insurance covers loss of or damage to a vessel due to marine perils such as collisions, grounding and weath- er and the coverage is usually to an agreed “insured value” which, as a matter of policy, is never less than the particular vessel’s fair market value. Cover is subject to policy deductibles which are always subject to change. Increased value insurance augments hull and machinery insurance cover by providing a low-cost means of increasing the insured value of the vessels in the event of a total loss casualty. Protection and indemnity insurance is the principal coverage for third party liabilities and indemnifies against such liabilities in- curred while operating vessels, including injury to the crew, third parties, cargo or third party property loss (including oil pollu- tion) for which the shipowner is responsible. We carry the current maximum available amount of coverage for oil pollution risks, $1.0 billion per vessel per incident. • • War Risks insurance covers such items as piracy and terrorism. • Freight, Demurrage & Defense cover is a form of legal costs insurance which responds as appropriate to the costs of prosecut- ing or defending commercial (usually uninsured operating) claims. 51 ANNUAL REPORT 2012 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, 2012. Type Hull and Machinery Increased Value (including Excess Liabilities) Protection and Indemnity (P&I) War Risk Aggregate Sum Insured For All Vessels in our Existing Fleet* $1.3 billion (increased value insurance (including excess liabilities) provides additional coverage). Up to $334.6 million additional coverage in total. Pollution liability claims: limited to $1.0 billion per vessel per incident. $1.7 billion *Certain of our bareboat charterers are responsible for the insurance on the vessels. The values attributed to those vessels are in line with the values agreed in the relevant charters as augmented by separate insurances. The International Shipping Industry The seaborne transportation industry is a vital link in international trade, with ocean going vessels representing the most effi- cient and often the only method of transporting large volumes of basic commodities and finished products. Demand for oil tankers is dictated by world oil demand and trade, which is influenced by many factors, including international economic activity; geographic changes in oil production, processing, and consumption; oil price levels; inventory policies of the major oil and oil trading com- panies; and strategic inventory policies of countries such as the United States, China and India. The drybulk trade is influenced by the underlying demand for the drybulk commodities, which, in turn, is influenced by the level of worldwide economic activity. Gen- erally, growth in gross domestic product, or GDP, and industrial production correlate with peaks in demand for marine drybulk trans- portation services. A wide range of cargoes are transported by container but most notably container transportation is responsible for the shipment of a diverse selection of manufactured and consumer goods in unitized form. These cargoes are transported by con- tainer to end users in all regions of the world, and in particular from key producing and manufacturing regions to end users in the world’s largest consumer economies. Growth in global container trade is being driven by growth in world merchandise trade, and the growing share in the containerized part thereof, along with the expansion in ‘containerization’ of new commodities and the trend towards globalization. Shipping demand, measured in tonne-miles, is a product of (a) the amount of cargo transported in ocean going vessels, multiplied by (b) the distance over which this cargo is transported. The distance is the more variable element of the tonne-mile demand equation and is determined by seaborne trading patterns, which are principally influenced by the locations of production and consumption. Seaborne trading patterns are also periodically influenced by geo-political events that divert vessels from normal trading patterns, as well as by inter-regional trading activity created by commodity supply and demand imbalances. Tonnage of oil shipped is primarily a function of global oil consumption, which is driven by economic activity as well as the long-term impact of oil prices on the location and related volume of oil production. Tonnage of oil shipped is also influenced by transportation alternatives (such as pipelines) and the output of refineries. Demand for tankers and tonnage of oil shipped is primarily a function of global oil consumption, which is driven by economic ac- tivity as well as the long-term impact of oil prices on the location and related volume of oil production. While global oil demand returned to limited growth in 2010, OECD demand has been contracting in the last three years, corresponding to approximately 46 million bar- rels per day (“mb/day”) in 2012, as a modest rise in Asia has been outweighed by decreasing demand in Europe and in the US. The crude tanker market experienced on average a more limited improvement, as the supply of crude tankers remained at historically high levels. According to the IEA, global oil product demand for 2012 has been revised as of December 12, 2012 to 89.7 mb/day compared to 88.9 mb/day during 2011. The IEA expects 2013 oil demand to grow by 0.9% to 90.5 mb/day. Tonnage of oil shipped is also influenced by transportation alternatives (such as pipelines) and the output of refineries. In 2012, it is estimated that ten refineries, predominantly in Europe and North America, with combined throughput of approximately 1.9 mb/day ceased operations as a result of weak margins. Total refinery capacity additions for the same period were approximately 513 kb/day in these two regions. The net effect was a reduction of approximately 1.3 mb/day in North America and Europe. On a global basis, it is estimat- ed that total refinery capacity increased by approximately 3.5 mb/day, with such increase primarily driven by the estimated 1.4 mb/day addition to refinery capacity in Asia during 2012. In 2013, a notable number of refineries are expected to start operations, particularly in Asia and in the Middle East. These new so-called super-refineries are expected to partly offset the lost refining capacity in the Atlantic basin through long haul exports, which could potentially have a positive impact on tonne-mile demand for product tankers as cargoes will be transported across longer distances. 52 ANNUAL REPORT 2012 Competition We operate in a highly fragmented, highly diversified global market with many charterers, owners and operators of vessels. Competition for charters in all the trades our vessels trade in, tankers, dry bulk and container, can be intense and the ability to obtain favorable charters depends, in addition to price, on a variety of other factors, including the location, size, age, condition and acceptability of the vessel and its operator to the charterer and is frequently tied to having an available vessel which has met the strict operational and fi- nancial standards established by the oil major companies to pre-qualify or vet tanker operators prior to entering into charters with them. Al- though we believe that at the present time no single company has a dominant position in the markets in which we compete, that could change and we may face substantial competition for medium to long-term charters from a number of experienced companies who may have greater resources or experience than we do when we try to recharter our vessels, especially as a large number of our vessels will come off charter during 2013. However, Capital Maritime is amongst a small number of ship management companies in the tanker sector that has under- gone and successfully completed (office) assessments by seven major international oil companies in the last few years, including audits with BP p.l.c., Chevron Corporation, Philips66 Inc., ExxonMobil Corporation, Royal Dutch Shell plc, Statoil ASA and Total S.A. We believe our ability to comply with the rigorous standards of major oil companies, relative to less qualified or experienced operators, allows us to effectively compete for new charters. Regulation General Our operations and our status as an operator and manager of ships are significantly regulated by international conventions, Class requirements, U.S. federal, state and local as well as non-U.S. health, safety and environmental protection laws and regulations, including OPA 90, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the U.S. Port and Tanker Safety Act, the Act to Prevent Pollution from Ships, the U.S. Clean Air Act (“Clean Air Act”), The Clean Water Act, as well as regulations adopted by the IMO and the European Union, various volatile organic compound air emission requirements, IMO/U.S. Coast Guard pollution regulations and various Safety of Life at Sea (“SOLAS”) amendments, as well as other regulations described below. In addition, various jurisdictions ei- ther have or are considering regulating the management of ballast water to prevent the introduction of non-indigenous species considered to be invasive. Compliance with these laws, regulations and other requirements could entail additional expense, including vessel modifi- cations and implementation of certain operating procedures. We are also required by various other governmental and quasi-governmental agencies to obtain permits, licenses and certificates for our vessels, depending upon such factors as the country of registry, the cargo transported, the trading area, the nationality of the vessel’s crew, the age and size of the vessel and our status as owner or charterer. Failure to maintain necessary permits, licenses or certificates could re- quire us to incur substantial costs or temporarily suspend operations of one or more of our vessels. We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will in the fu- ture impose greater inspection and safety requirements on all types of vessels in the shipping industry. In addition to inspections by us, our vessels are subject to both scheduled and unscheduled inspections by a variety of governmental and private entities, each of which may have unique requirements. These entities include the local port authorities (such as U.S. Coast Guard, harbor master or equivalent), classifica- tion societies, flag state administration P&I Clubs, charterers, and particularly terminal operators and major oil companies which conduct frequent vessel inspections. It is our policy to operate our vessels in full compliance with applicable environmental laws and regulations. However, regulatory pro- grams are complex and because such laws and regulations frequently change and may impose increasingly strict requirements, we cannot predict the ultimate cost of complying with these and any future requirements or their impact on the resale value or useful life of our ves- sels. United States Requirements The United States regulates the tanker industry with an extensive regulatory and liability regime for environmental protection and the cleanup of oil spills, primarily through OPA 90, CERCLA and certain coastal state laws. OPA 90 affects all vessel owners and operators transporting crude oil or petroleum products to, from, or within U.S. waters. The law phases out the use of tankers having single-hulls and can effectively impose unlimited liability on vessel owners and operators in the event of an oil spill. Under OPA 90, vessel owners, operators and bareboat charterers are liable, without regard to fault, for all containment and clean-up costs and other damages, including natural resource damages, and for certain economic losses, arising from oil spills and pollu- 53 ANNUAL REPORT 2012 tion from their vessels. Effective July 31, 2009, the U.S. Coast Guard adopted interim regulations that adjust the limits of OPA liability for environmental damages for double-hull vessels to the greater of $2,000 per gross ton or $17,088,000 million per tanker that is over 3,000 gross tons (subject to possible adjustment for inflation), unless the incident is caused by gross negligence, willful misconduct, or a viola- tion of certain regulations, in which case liability is unlimited. In addition, OPA 90 does not preempt state law and permits individual states to impose their own stricter liability regimes with regard to oil pollution incidents occurring within their boundaries. Coastal states have en- acted pollution prevention, liability and response laws, many providing for unlimited liability. As a result of the oil spill in the Gulf of Mex- ico resulting from the explosion of the Deepwater Horizon drilling rig, bills have been introduced in both houses of the U.S. Congress to increase the limits of OPA liability for all vessels, including tanker vessels. CERCLA applies to the discharges of hazardous substances (other than oil) whether on land or at sea, and contains a liability regime that provides for cleanup, removal and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 million for vessels carrying any hazardous substances as cargo, or $0.5 million for any other vessel, per release of or incident in- volving hazardous substances. These limits of liability do not apply if the incident is caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited. The financial responsibility regulations for tankers issued under OPA 90 also require owners and operators of vessels entering U.S. wa- ters to obtain, and maintain with the U.S. Coast Guard, Certificates of Financial Responsibility, or COFRs, in the amount sufficient to meet the maximum aggregate liability under OPA 90 and CERCLA. All of our vessels that need COFRs have them. We insure each of our tankers with pollution liability insurance in the maximum commercially available amount of $1.0 billion per inci- dent. A catastrophic spill could exceed the insurance coverage available, in which event there could be a material adverse effect on our busi- ness. OPA 90 requires that tankers over 5,000 gross ton calling at U.S. ports have double hulls. All of the vessels in our fleet have double hulls. We believe that we are in compliance with OPA 90, CERCLA and all applicable state regulations in U.S. ports where our vessels call. OPA 90 also amended the Clean Water Act to require owners and operators of vessels to adopt contingency plans for reporting and re- sponding to oil spill scenarios up to a “worst case” scenario and to identify and ensure, through contracts or other approved means, the avail- ability of necessary private response resources to respond to a “worst case discharge.” In addition, periodic training programs and drills for shore and response personnel and for vessels and their crews are required. Our vessel response plans have been approved by the U.S. Coast Guard. The Clean Water Act prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form of penalties for unauthorized discharges. The Clean Water Act also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under the more recent OPA 90 and CERCLA, discussed herein. U.S. Environmental Protection Agency (“EPA”) regulations govern the discharge into U.S. waters of ballast water and other substances incidental to the normal operation of vessels. Under EPA regulations, commercial vessels greater than 79 feet in length are required to obtain coverage under the Ves- sel General Permit, or VGP, by submitting a Notice of Intent. The VGP incorporates current U.S. Coast Guard requirements for ballast wa- ter management as well as supplemental ballast water requirements and includes technology-based and water-quality based limits for other discharges, such as deck runoff, bilge water and gray water. Administrative obligations, such as monitoring, recordkeeping and reporting re- quirements also apply. We have submitted NOIs for our vessels operating in U.S. waters and will likely incur costs to meet the requirements of the VGP. In addition, various states, such as Michigan and California, have also enacted, or proposed, legislation restricting ballast water discharges and the introduction of non-indigenous invasive species. These and any similar restrictions enacted in the future could include bal- last water treatment obligations that could increase the cost of operating in the United States. For example, this could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost and/or otherwise restrict our vessels from entering certain U.S. waters. The Clean Air Act requires the EPA to promulgate standards applicable to emissions of volatile organic compounds, hazardous air pol- lutants and other air contaminants. The Clean Air Act also requires states to draft State Implementation Plans (“SIPs”) designed to attain national health-based air quality standards, which have significant regulatory impacts in major metropolitan and/or industrial areas. Sever- al SIPs regulate emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. Individual states, including California, have also attempted to regulate vessel emissions within state waters. California also has adopted fuel content regulations that will apply to all vessels sailing within 24 miles of the California coastline or whose itineraries call for them to en- ter any California ports, terminal facilities, or internal or estuarine waters. In addition, on March 26, 2010, IMO designated the area extending 200 miles from the U.S. territorial sea baseline adjacent to the Atlantic/Gulf and Pacific coasts and the eight main Hawaiian Islands as Emis- sion Control Areas under recent amendments to the Annex VI of MARPOL (discussed below). In addition, regulatory initiatives to require cold-ironing (shore-based power while docked) are under consideration in a number of jurisdictions to reduce air emissions from docked ships. These or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the EPA, the states or local jurisdictions where we operate, compliance with these regulations could entail significant capital ex- penditures or otherwise increase the costs of our operations. 54 ANNUAL REPORT 2012 International Requirements The IMO has also negotiated international conventions that impose liability for oil pollution in international waters and a signatory’s territorial waters. In September 1997, the IMO adopted Annex VI to the International Convention for the Prevention of Pollution from Ships to address air pollution from ships. Annex VI, which became effective in May 2005, sets limits on sulfur oxide and nitrogen oxide emis- sions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also in- cludes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emis- sions. The MEPC adopted amendments to Annex VI to the MARPOL, which entered into force on July 1, 2010, regarding particulate mat- ter, nitrogen oxide and sulfur oxide emissions. The revised Annex VI reduces air pollution from vessels by, among other things (i) imple- menting a progressive reduction of sulfur oxide emissions from ships, with the global sulfur cap reduced initially to 3.50% (from the cur- rent cap of 4.50%), effective from January 1, 2012, then progressively to 0.50%, effective from January 1, 2020, subject to a feasibility re- view to be completed no later than 2018; and (ii) establishing new tiers of stringent nitrogen oxide emissions standards for new marine en- gines, depending on their date of installation. Additionally, more stringent emission standards could apply in coastal areas designated as Emis- sion Control Areas. We may incur additional costs to comply with these revised standards. A failure to comply with Annex VI requirements could result in a vessel not being able to operate. All of our vessels are subject to Annex VI regulations. We believe that our existing ves- sels meet relevant Annex VI requirements and that our undelivered product tankers will be fitted with these emission control systems pri- or to their delivery. The ISM Code, promulgated by the IMO, also requires the party with operational control of a vessel to develop an extensive safety man- agement system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. The ISM Code requires that ves- sel operators obtain a safety management certificate for each vessel they operate. No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code. All of our ocean-going vessels are ISM certified. Noncompliance with the ISM Code and other IMO regulations may subject the shipowner or bareboat charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. For example, the U.S. Coast Guard and EU authorities have indicated that vessels not in compliance with the ISM Code will be pro- hibited from trading in U.S. and EU ports. Many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the “CLC”) (the United States, with its separate OPA 90 regime, is not a party to the CLC). Under this convention and depending on whether the country in which the damage results is a party to the 1992 Protocol to the Inter- national Convention on Civil Liability for Oil Pollution Damage, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain defenses. Under an amendment to the Pro- tocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons, liability will be limited to approximately $7.1 million plus $989.2 for each additional gross ton over 5,000. For vessels of over 140,000 gross tons, liability will be limited to ap- proximately $140.7 million. As the convention calculates liability in terms of a basket of currencies, these figures are based on curren- cy exchange rates on December 31, 2010. The right to limit liability is forfeited under the International Convention on Civil Liability for Oil Pollution Damage where the spill is caused by the owner’s actual fault and under the 1992 Protocol where the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to states that are parties to these conventions must provide evidence of in- surance covering the liability of the owner. In jurisdictions where the International Convention on Civil Liability for Oil Pollution Dam- age has not been adopted, various legislative schemes or common law regimes govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. We believe that our P&I insurance will cover the liability required under the plan adopted by the IMO. In 2001, the IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, which imposes strict liability on ship owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker oil. The Bunker Convention also requires registered owners of ships over a certain size to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calcu- lated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). The Bunker Convention en- tered into force on November 21, 2008. We have made relevant arrangements and our entire fleet has been issued with a certificate attest- ing that insurance is in force in accordance with the insurance provisions of the convention. IMO regulations also require owners and operators of vessels to adopt Shipboard Marine Pollution Emergency Plans (“SMPEPs”). Pe- riodic training and drills for response personnel and for vessels and their crews are required. The SMPEPs required for our vessels are in place. In addition, our operations are subject to compliance with the International Bulk Chemical (“IBC”) Code, as required by MARPOL and 55 ANNUAL REPORT 2012 SOLAS for chemical tankers built after July 1, 1986, which provides ship design, construction and equipment requirements and other stan- dards for the bulk transport of certain liquid chemicals. Under October 2004 amendments to the IBC Code (implemented to meet recent re- visions to SOLAS and Annex II to MARPOL), some previously unrestricted vegetable oils, including animal fats and marine oils, must be transported in chemical tankers meeting certain double-hull construction requirements. Our vessels may transport such cargoes but are re- stricted as to the volume they are able to transport per cargo tank. This restriction does not apply to edible oils. In addition, those amend- ments require re-evaluation of the categorization of certain products with respect to their properties as marine pollutants, as well as related ship type and carriage requirements. Where necessary pollution data is not supplied for those products, bulk carriage of such products could be prohibited. In 2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling Systems on Ships (the “Anti-fouling Convention”) which prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels. The Anti-fouling Convention came into force on September 17, 2008 and applies to vessels constructed prior to January 1, 2003 that have not been in drydock since that date. The effective date of the Anti-fouling Convention was January 1, 2008. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and must undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained Anti-Fouling System Certificates for all of our vessels that are subject to the Anti-Fouling Convention and do not believe that maintaining such certificates will have a ma- terial adverse financial impact on the operation of our vessels. Climate Change and Greenhouse Gas Regulation Increasing concerns about climate change have resulted in a number of international, national and regional measures to limit green- house gas emissions and additional stricter measures can be expected in the future. In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or Kyoto Protocol, entered into force. Pursuant to the Kyoto Protocol, adopting coun- tries are required to implement national programs to reduce emissions of certain gases, generally referred to as greenhouse gases, which are suspected to contribute to global warming. Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol. However, a new treaty may be adopted in the future that includes restrictions on shipping emissions. The Euro- pean Union also has indicated that it intends to propose an expansion of the existing European Union emissions trading scheme to in- clude emissions of greenhouse gases from vessels. In the United States, the EPA is considering a petition from the California Attorney General to regulate greenhouse gas emissions from ocean-going vessels. In addition, the EPA has begun regulating greenhouse gas emis- sions under the Clean Air Act and climate change initiatives are being considered in the U.S. Congress. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where we operate that restrict emis- sions of greenhouse gases could have a financial impact on our operations that we cannot predict with certainty at this time. In addition, scientific studies have indicated that increasing concentrations of greenhouse gases in the atmosphere may produce climate changes with significant physical effects, such as increased frequency and severity of storms, floods and other severe weather events that could affect our operations. Vessel Security Regulations Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On No- vember 25, 2002, the Maritime Transportation Security Act of 2002 (“MTSA”) came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels oper- ating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime secu- rity. The new chapter went into effect in July 2004, and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the newly created International Ship and Port Facilities Security (“ISPS”) Code. Among the various requirements are: • • • • on-board installation of automatic identification systems to enhance vessel-to-vessel and vessel-to-shore communications; on-board installation of ship security alert systems; the development of vessel security plans; and compliance with flag state security certification requirements. The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempted non-U.S. vessels from MTSA vessel security measures provided such vessels had on board, by July 1, 2004, a valid International Ship Security Certificate that at- tests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We have implemented the various security meas- ures addressed by the MTSA, SOLAS and the ISPS Code and have ensured that our vessels are compliant with all applicable security re- quirements. 56 C. Organizational Structure ANNUAL REPORT 2012 100% Membership Interest Capital GP L.L.C (General Partner) 1,415,757 GP Units 1,6% General Partner Interest Capital Maritime & Trading Corp. (Sponsor) 17,763,305 Common Units 3,433,333 Class B Units Public Unitholders* 51,608,772 Common Units 12,122,221 Class B Units 24,6% Limited Partner Interest 73,8% Limited Partner Interest Capital Product Partners L.P. 100% Membership Interest 100% Equity Interest Capital Product Operating L.L.C Crude Carriers Corp. Operating Subsidiaries Crude Carriers Operating Corp. Operating Subsidiaries *Includes common units held by our chairman Evangelos M. Marinakis and common units issued upon conversation of the Crude Car- riers shares upon completion of the merger with Crude Carriers, including common units resulting from the conversion of the Crude Car- riers Class B shares owned by Crude Carriers Investments and common units resulting from the conversion of Crude Carriers common shares issued under the Crude Plan as well as common units issued under our Plan. Please also see Note 1 (Basis of Presentation and General Information) to our Financial Statements included herein and Exhibit 8.1 to this Annual Report for a list of our significant subsidiaries as of December 31, 2012. D. Property, Plants and Equipment Other than our vessels, we do not have any material property. Our obligations under our credit facilities are secured by all our vessels. For further details regarding our credit facilities, please read “Item 5B: Liquidity and Capital Resources—Borrowings—Revolving Credit Facilities”. 57 ANNUAL REPORT 2012 Item 4 A. Unresolved Staff Comments. All SEC staff comments received during the fiscal year 2012 have been reflected in this Annual Report. Item 5. Operating and Financial Review and Prospects. You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated Financial Statements for the years ended December 31, 2012, 2011 and 2010 and related notes included elsewhere in this Annual Report. Among other things, the Financial Statements include more detailed information regarding the basis of presentation for the following in- formation. The Financial Statements have been prepared in accordance with U.S. GAAP and are presented in thousands of U.S. Dollars. A. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are an international shipping company formed in January 2007 by Capital Maritime, an international shipping company with a long history of operating and investing in the shipping market. Our fleet currently consists of 25 modern high specification vessels with an av- erage age of approximately 5.8 years (December 31, 2012). During 2012 we completed the issuance and sale of 15,555,554 Class B Units, including 3,433,333 Class B Units to Capital Maritime, which are convertible at any time into common units on a one-for-one basis. With the exception of the first quarterly distribution which was set at $0.26736 per unit, the Class B Units pay a fixed quarterly distribution of $0.21375 per unit representing an annualized distribution yield of 9.5%. The issued Class B Units have certain rights that are senior to the rights of the holders of common units, such as the right to distributions and rights upon liquidation of the Partnership reflected in the Second Amendment to the Partnership Agreement. In connec- tion with the issuance and sale of the Class B Units we also entered into amendments to our three credit facilities, providing amongst oth- ers for the deferral of scheduled amortization payments under each of our three credit facilities until March 2016, and prepaid debt of $149.6 million. Please see our Current Reports on Form 6-K furnished to the SEC on May 23, 2012 and June 6, 2012 and Note 7 (Long Term Debt) and Note 13 (Partners’ Capital/Stockholders’ Equity) to our Financial Statements included herein for more information. In addition, during 2012 we sold the two small tankers in our fleet to unrelated third parties and acquired all of Capital Maritime’s interest in its wholly owned subsidiaries that owned the two 7,943 TEU container carrier vessels M/V Archimidis and M/V Agamemnon, both built at Daewoo Ship- building in South Korea and under medium term time charters with Maersk Line in exchange for all of our interest in our wholly owned subsidiaries that owned the two VLCCs M/T Alexander the Great and M/T Achilleas (the “2012 Vessel Sale”). We received a total net con- sideration of $0.3 million in connection with this transaction and Capital Maritime has waived any compensation for the early termination of the charters of the M/T Alexander the Great and M/T Achilleas. In view of this transaction, we repaid $5.2 million in debt. Please see “Item 4B: Business Overview —Our Management Agreements” above for a detailed description of the management agree- ments we have entered into with Capital Ship Management. Please see “Item 4B: Business Overview —Our Fleet” and “—Our Charters” above for a detailed description of the vessels in our fleet, and their employment, including earliest possible redelivery dates of the vessels and relevant charter rates and operating expenses. As of December 31, 2012, the Marinakis family, including Evangelos M. Marinakis, our chairman, may be deemed to beneficially own a 30.3% interest in us through its beneficial ownership, amongst others, of Capital Maritime and of Crude Carriers Investments. Notwithstanding the ongoing challenges to the global economy and historically low charter rates, our primary business objective is to pay a sustainable quarterly distribution per unit and to increase our distributions over time, subject to shipping, charter and financial mar- ket developments and our financing requirements. Our strategy focuses on maintaining and growing our cash flows while maintaining and building on our ability to meet rigorous industry and regulatory safety standards. We believe that the medium to long-term, fixed-rate nature of our charters, our profit sharing arrangements, and our cost-efficient ship management operations under our agreements with Capital Ship Management and the fact that we currently have no capital commitments to purchase or build further vessels provide visibility of revenues in the medium to long-term. As our vessels come up for rechartering we will seek to redeploy them at contracts that reflect our expectations of the market conditions prevailing at the time. We intend to continue to evaluate potential opportunities to acquire both newbuildings and second-hand vessels from Capital Maritime and from third parties (in- cluding, potentially, through the acquisition of, or combination with, other shipping businesses) and leverage the expertise and reputation of Capital Maritime in a prudent manner that is accretive to our unitholders and to long-term distribution growth, subject to approval of our board of directors and overall market conditions. In connection with evaluating and pursuing these opportunities, and as we seek to opti- 58 ANNUAL REPORT 2012 mize our capital structure, we may also to evaluate and pursue financing opportunities from external financing sources, including bank bor- rowings and the issuance of debt and equity securities. Please see “—Factors Affecting our Future Results of Operations” below. Please also see “Item 4B: Business Overview” above, for a description of the historical development of our company and a description of the significant acquisitions and financial events to date, including a more detailed description of the issuance and sale of the Class B Units, “Item 5A: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting for Acquisition and Disposal of Vessels and Merger with Crude Carriers Corp.” and “Item 5B: Liquidity and Capital Resources—Net Cash Provided by/(Used in) In- vesting Activities” and “Item 7B: Related-Party Transactions” for a description of the terms of certain transactions. Our Charters We generate revenues by charging our customers for the use of our vessels to transport their products. Historically, we have provided services to our customers under time or bareboat charter agreements. As of December 31, 2012, all of the 25 vessels in our fleet were trad- ing in the period market. Our vessels are currently under contracts with BP Shipping Limited, Capital Maritime, Petrobras, Arrendadora, Subtec, Cosco, Maer- sk Line and OSG. For the year ended December 31, 2012, Capital Maritime and BP Shipping Limited accounted for 45% and 23% of our revenues, respectively. For the year ended December 31, 2011, Capital Maritime, BP Shipping Limited and OSG accounted for 24%, 32% and 11% of our revenues, respectively. For the year ended December 31, 2010, BP Shipping Limited, Morgan Stanley Capital Group Inc. and OSG accounted for 49%, 11% and 11% 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. In the fu- ture, as our fleet expands, we also expect to enter into charters with new charterers in order to maintain a portfolio that is diverse from a customer, geographic and maturity perspective. Please read “Item 4B: Business Overview—Our Fleet”, “—Our Charters” and “—Profit Sharing Arrangements” for additional details regarding these types of contractual relationships as well as a detailed description of the length and daily charter rate of our charters and in- formation regarding the calculation of our profit share arrangements. Accounting for Acquisition and Disposal of Vessels and Merger with Crude Carriers On December 22, 2012, we acquired all of the interest in Capital Maritime’s wholly owned subsidiaries that owned two container car- rier vessels which were under medium term time charters, the M/V Archimidis and the M/V Agamemnon, in exchange for all of our inter- est in our wholly owned subsidiaries that owned our two VLCC’s, the M/T Alexander the Great and the M/T Achilleas. According to the Accounting Standard Codification (“ASC”) 805 “Business Combinations”, and the three elements that are defined in ASC 805-10-55-4 through 805-10-55-9 we have determined that the acquisition of each of the M/V Archimidis and the M/V Agamemnon constitutes an acquisition of a business. In our case, the fair value of net assets acquired of $70,250 in the case of the acquisition of the M/V Agamemnon and the fair value of net assets acquired of $67,250 in the case of the acquisition of the M/V Archimidis are both equal to the purchase consideration, therefore no goodwill or gain from bargain purchase was recognized for both transactions. On September 30, 2011, the merger between us and Crude Carriers was successfully completed. We have accounted for the acquisition of Crude Carriers using the acquisition method of accounting. According to the ASC 805-30 “Business Combination” all assets acquired and liabilities assumed must be recorded at fair value. In our case the fair value of net assets acquired of $223.0 million exceeded the pur- chase consideration of $157.1 million and therefore a gain from bargain purchase of $65.9 million was recognized in our consolidated state- ments of comprehensive income. The acquisition of Crude Carriers was funded by the issuance of 24,967,240 common units to the hold- ers of Crude Carriers’ shares. Our partnership agreement provides that our board of directors has the power to oversee, direct the operation, and determine our strate- gies and policies. It also sets out the extent of the power that the general partner has regarding our management, operations and affairs. Fol- lowing our annual general meeting of common unitholders on July 22, 2010, and the elections of two Class III directors, the majority of our board has been elected by non-Capital Maritime controlled unitholders. As a result, we are not considered to be under common control with Capital Maritime. As a consequence, starting with July 22, 2010, we no longer account for vessel acquisitions from Capital Maritime as transfer of equity interest between entities under common control. Prior to July 22, 2010, when we and Capital Maritime were under common control, all the vessel owning companies we acquired from Capital Maritime were recorded by us at net book value reflected by Capital Maritime and accounted for as a combination of entities un- 59 ANNUAL REPORT 2012 der common control or a transfer of equity interest between entities under common control. For a combination between entities under com- mon control, the purchase cost provisions (as they relate to purchase business combinations involving unrelated entities) explicitly do not apply; instead the method of accounting prescribed by accounting standards for such transfers is similar to pooling-of-interests method of accounting. Under this method, the carrying amount of assets and liabilities recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination. Purchase premium or discount representing the difference between the cash consideration paid and the book value of the net assets acquired was recorded as increase or decrease to the Partners’ capital. Vessel owning companies that had an operating history as part of Capital Maritime’s fleet, prior to their acquisition by us have been treat- ed as acquisitions of business as such vessels were acquired from entity under common control with existing time charters, strategic man- agement and operational resource management processes. As a result, transfers of equity interests between entities under common control were accounted for as if the transfer occurred at the beginning of the period, and prior years were retroactively adjusted to furnish comparative information similar to the pooling-of interest method. Vessels that had no operating history and were delivered to us from the shipyards through Capital Maritime have been treated as an acquisition of assets from an entity under common control. For additional information on how we have accounted for the transfers of vessels please see Note 3 (acquisitions) to our Financial State- ments included herein. Factors Affecting Our Future Results of Operations We are primarily exposed to the tanker market as (a) the majority of vessels in our fleet are either crude or product tankers, and (b) most of the charters that have expired over the previous 12 months or are expected to expire in the coming 12 months are for our product or crude tanker vessels. We believe the principal factors that will affect our future results of operations are the economic, regulatory, financial, cred- it, political and governmental conditions that affect the shipping industry generally and that affect conditions in countries and markets in which our vessels engage in business. The world economy has been experiencing significant economic and political challenges since 2008 as well as a severe deterioration in the banking and credit markets which have had, and continue to have, a negative impact on world trade and which may affect our ability to obtain financing as well as further impact the values of our vessels and the charters we are able to ob- tain for our vessels. The pace of recovery of the world economy and demand for the seaborne transportation of goods, including oil and oil products and for dry and containerized goods, and the deliveries of newbuilding vessels will affect the shipping industry in general and our future results. Other key factors that will be fundamental to our business, future financial condition and results of operations include: • • • • • • • • • • • the demand for seaborne transportation services; levels of oil product demand and inventories; charter hire levels and our ability to recharter our vessels as their current charters expire; our ability to service our debt and, when the non-amortizing period expires in March 2016, to refinance our existing indebtedness or, in the event such indebtedness is not refinanced, our obligation to make principal payments under our credit facilities; supply of vessels, especially tankers, and specifically the number of newbuildings entering the world tanker fleet each year; the ability to increase the size of our fleet and make additional acquisitions that are accretive to our unitholders; the ability of Capital Maritime’s commercial and chartering operations to successfully employ our vessels at economically attrac- tive rates, particularly as our fleet expands and our charters expire; the continuing demand for goods from China, India, Brazil and Russia and other major emerging markets; our ability to benefit from new maritime regulations concerning the phase-out of single-hull vessels and the more restrictive regu- lations for the transport of certain products and cargoes; our ability to comply with the covenants in our credit facilities, including covenants relating to the maintenance of vessel value ratios; the increased costs associated with the renewal of our technical management agreement and transition to a floating fee based on ac- tual expenses for certain of our vessels; the effective and efficient technical management of our vessels; the costs associated with upcoming dry drocking of our vessels which are not covered by our management agreements; • • • Capital Maritime’s ability to obtain and maintain major international oil company approvals and to satisfy their technical, health, • safety and compliance standards; and the strength of and growth in the number of our customer relationships, especially with major international oil companies and ma- jor commodity traders. In addition to the factors discussed above, we believe certain specific factors have impacted, and will continue to impact, our results of operations. These factors include: • the charter hire earned by our vessels under time charters and bareboat charters; 60 ANNUAL REPORT 2012 • • • • • • • our ability to recharter our vessels on medium to long term charters at competitive rates; our ability to comply with the covenants in our credit facilities, including covenants relating to the maintenance of vessel value ra- tios, as the recent decline in vessel values and charter rates may limit our ability to pursue our business strategy; the prevailing spot market rates and the number of our vessels which we operate on the spot market our access to debt, and equity and the cost of such capital, required to acquire additional vessels and/or to implement our business strategy; our ability to sell vessels at prices we deem satisfactory; our level of debt and the related interest expense and amortization of principal; and the level of any distribution on our common units. Please read “Item 3D: Risk Factors” above for a discussion of certain risks inherent in our business. Factors to Consider When Evaluating Our Results We believe it is important to consider the following factors when evaluating our results of operations: • Financial Statements. Our Financial Statements include the results of operations of different numbers of vessels in each year and have been retroactively adjusted to reflect the results of operations of all non-contracted vessels we acquired prior to July 22, 2010, as if they were owned by us for the entire period from their delivery to Capital Maritime. In certain cases, the Financial Statements have also been adjusted to reflect financial position and cash-flow items prior to delivery of the relevant vessel to Capital Maritime for acquisitions we made prior to July 22, 2010. Vessel owning companies acquired subsequent to July 22, 2010, are reflected in our Financial Statements as of the date of the acquisition. Please read “—Accounting for Acquisition and Disposal of Vessels and Merger with Crude Carriers Corp.” above for a description of the financial treatment of vessel acquisitions and dispositions. • Vessel Acquisitions and Disposals . Vessels that have been acquired or delivered to us prior to July 22, 2010, are included in our re- sults of operations, cash flows and financial position from the date of incorporation of the relevant vessel owning company or, in the case of the seven vessels we contracted to acquire at the time of our IPO which were delivered during 2007 and 2008, as of their delivery date from the shipyard to Capital Maritime and us. Results of operations, cash flows and financial position of vessels that have been disposed of are included in our Financial Statements up to the date of their disposal. As a result of this accounting treat- ment, our Financial Statements may include results of operations of more vessels than actually comprised our fleet during the rel- evant year. Please read “—Accounting for Acquisition and Disposal of Vessels and Merger with Crude Carriers Corp.” above for a description of the financial treatment of vessel acquisitions. The table below shows the periods for which the results of operations and cash flows for each vessel owning company are included in our Financial Statements. VESSELS INCLUDED IN OUR FINANCIAL STATEMENTS AND ACQUISITION DATA Vessel Incorporation date of VOC* M/T Atlantas (1) M/T Assos (1)(2) M/T Aktoras (1) M/T Agisilaos (1) M/T Arionas (1) M/T Avax (1) M/T Aiolos (1) M/T Axios (1) M/T Atrotos (3) (4) M/T Akeraios (3) M/T Apostolos (3) M/T Anemos I (3) M/T Attikos (5) (9) 09/16/2003 03/18/2004 08/27/2003 10/10/2003 11/10/2003 02/10/2004 09/12/2003 02/10/2004 02/11/2004 02/03/2004 05/26/2004 07/08/2004 12/29/2003 Date acquired by Capital Maritime 04/26/2006 05/17/2006 07/12/2006 08/16/2006 11/02/2006 01/12/2007 03/02/2007 02/28/2007 05/08/2007 07/13/2007 09/20/2007 09/28/2007 01/20/2005 Date acquired by us 04/04/2007 04/04/2007 & 08/16/2010 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 05/08/2007 & 03/01/2010 07/13/2007 09/20/2007 09/28/2007 09/24/2007 Vessel included in Consolidated Financial Statements for the years ended December 31, 2011 2012 2010 X X X X X X X X X X X X Up to Feb 14 X X X X X X X X X X X X X X Since Aug 16 X X X X X X X X X X X 61 ANNUAL REPORT 2012 Vessel Incorporation date of VOC* 02/07/2006 M/T Alexandros II (3) 05/29/2007 M/T Amore Mio II (5) 02/03/2004 M/T Aristofanis (5) (9) 02/07/2006 M/T Aristotelis II (3) 01/24/2006 M/T Aris II (3) 07/14/2006 M/T Agamemnon II (2)(5) 07/14/2006 M/T Ayrton II (4)(5) 06/22/2004 M/T Alkiviadis (5) M/V Cape Agamemnon (6) 06/17/2008 M/T Alexander the Great (7) (8) 01/26/2010 01/26/2010 M/T Achilleas (7) (8) 04/06/2006 M/T Miltiadis M II (7) 04/14/2010 M/T Amoureux (7) 04/14/2010 M/T Aias (7) 04/19/2012 M/V Agamemnon (8) 04/19/2012 M/V Archimidis (8) Date acquired by Capital Maritime 01/29/2008 07/31/2007 06/02/2005 06/17/2008 08/20/2008 11/24/2008 04/10/2009 03/29/2006 01/25/2011 - - 04/26/2006 - - 6/28/2012 6/22/2012 Date acquired by us 01/29/2008 03/27/2008 04/30/2008 06/17/2008 08/20/2008 04/07/2009 04/13/2009 06/30/2010 06/09/2011 09/30/2011 09/30/2011 09/30/2011 09/30/2011 09/30/2011 12/22/2012 12/22/2012 Vessel included in Consolidated Financial Statements for the years ended December 31, 2012 2011 2010 X X Up to Apr4 X X X X X X Up to Dec 21 Up to Dec 21 X X X Since Dec 22 Since Dec 22 X X X X X X X X X X X X X X - - X X X X X X X X - - - - - - - - * VOC: Vessel Owning Company (1) Initial Vessels. The Financial Statements have been retroactively adjusted to reflect their results of operations as of the incorpo- ration date of their respective vessel owning companies. (2) On April 7, 2009 the M/T Assos (which was part of our fleet at the time of the IPO) was exchanged for the M/T Agamemnon II. We subsequently re-acquired the M/T Assos from Capital Maritime on August 16, 2010. (3) Committed Vessels. These vessels are newbuildings which were delivered directly to us from Capital Maritime on their deliv- ery dates from the shipyards and had no prior operating history. As such, there is no information to retroactively restate that should be considered and the results of operations are presented in the Financial Statements since their delivery dates. (4) On April 13, 2009 the M/T Atrotos (which was acquired from Capital Maritime in May 2007) was exchanged for the M/T Ayr- ton II. We subsequently re-acquired the M/T Atrotos from Capital Maritime on March 1, 2010. (5) Non-Contracted Vessels. The Financial Statements have been retroactively adjusted to reflect their results of operations as of the incorporation date of their respective vessel owning companies (with the exception of M/T Assos for the period from April 17, 2009 to August 15, 2010). (6) Our Financial Statements include the results of operations of the vessel owning of the M/V Cape Agamemnon and cash flows since the date of its acquisition by us on June 9, 2011. (7) Our Financial Statements include: • Results of operations and cash flows of Crude Carriers and its subsidiaries since the completion of the merger on September 30, 2011 in a unit-for-share transaction following which Crude Carriers became a wholly owned subsidiary of ours; and • The statement of financial position of Crude Carriers and its subsidiaries as of the date of the completion of the merger after giving effect to Accounting Standard Codification (“ASC”) 805-30 “Business Combination” where all assets acquired and li- abilities assumed (of Crude Carriers Corp. and its subsidiaries) were recorded at fair value. (8) On December 22, 2012, we acquired the vessel owning companies of the M/V Archimidis and the M/V Agamemnon from Capi- tal Maritime in exchange for the vessel owning companies of the M/T Alexander the Great and the M/T Achilleas, respectively. (9) During the first half of 2012 we sold the M/T Attikos and the M/T Aristofanis, the two small tankers in our fleet, to unrelated third parties. • Different Structure of Operating Expenses. We have entered into three separate technical and commercial management agree- ments with Capital Ship Management for the management of our fleet and each vessel in our fleet is managed under the terms of one of these three agreements. Each agreement has a different structure of operating expenses. We expect that as the fixed fee management agreement expires for certain of our vessels, such vessels, and any additional acquisitions we make in the future, 62 ANNUAL REPORT 2012 shall be managed under these floating fee management agreements. Operating expenses for any vessel in our fleet (apart from M/T Assos and M/T Atrotos from the time they were chartered to Arrendadora) prior to its acquisition by us represent actual costs incurred by the vessel owning companies and Capital Ship Management in the operation of the vessels that were operated as part of Capital Maritime’s fleet, including costs associated with any surveys undergone by vessels, including the relevant drydock- ing. For a detailed description of the management agreements and the fees we pay our manager please read “Item 4: Business Overview —Our Management Agreements” above. • The Size of our Fleet Continues to Change. As of the date of this Annual Report our fleet consisted of 25 vessels. At the time of our IPO in 2007, our fleet consisted of eight vessels and in January 2011 it had increased to 21 vessels. During 2011 we ac- quired a cape size vessel from Capital Maritime and also incorporated the five crude tanker vessels that were part of the Crude Carriers fleet prior to its merger with us in September 2011 into our fleet. During 2012 we exchanged two VLCCs we had ac- quired as part of the merger with Crude Carriers for two post panamax container carrier vessels owned by Capital Maritime and sold the two small tankers in our fleet. We intend to continue to evaluate potential acquisitions of vessels or other shipping busi- nesses in a prudent manner that is accretive to our distributable cash flow per unit. Results of Operations Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Results of operations for the years ended December 31, 2012 and December 31, 2011 differ primarily due to the full year results of operations of Crude Carriers into our Financial Statements, the repayment of debt of $175.2 million mainly through the proceeds from the issuance of our Class B units and the sale of our two small tankers, the expiration and the close out of certain interest rate swap agreements and the larger number of vessels managed under our floating fee management agreement as well as the impairment charge in relation to the disposal of two our vessels. Total Revenues Time, voyage and bareboat charter revenues amounted to approximately $154.0 million for the year ended December 31, 2012, as compared to $130.3 million for the year ended December 31, 2011. The increase of $23.7 million is primarily attributable to the increased number of vessels in our fleet following the full year consolidation of Crude Carriers’ vessels in 2012 as compared to the year ended December 31, 2011 when the Crude Carriers vessels were operated only during the last three months of the year. For the year ended De- cember 31, 2012, $69.9 million of total revenues represented charter hire received from Capital Maritime as compared to $31.8 million of total revenues for the year ended December 31, 2011. The increase of $38.1 million in charter hire received from Capital Maritime is attributable to the increased number of vessels in our fleet chartered with Capital Maritime for the period. Time, voyage and bareboat charter revenues are mainly comprised of the charter hire received from unaffiliated third-party customers and Capital Maritime and are affected by the number of days our vessels operate, the average number of vessels in our fleet and the charter rates. Please read “Item 4B: Business Overview—Our Fleet” and “—Our Charters” for information about the charters on our vessels, including daily charter rates. Voyage Expenses Voyage expenses amounted to $5.7 million for the year ended December 31, 2012, as compared to $11.7 million for the year end- ed December 31, 2011. The lower voyage expenses for 2012 were primarily attributable to the decreased number of voyage charters compared to 2011. Voyage expenses are direct expenses to voyage revenues and primarily consist of commissions, port expenses, canal dues and bunkers. Voyage costs, except for commissions, are paid for by the charterer under time and bareboat charters. Voyage costs under voyage char- ters are paid for by the owner. Vessel Operating Expenses For the year ended December 31, 2012, our vessel operating expenses amounted to approximately $45.8 million, of which $23.6 mil- lion was incurred under our management agreements with our manager and include $1.9 million in additional fees and costs relating to certain costs associated with the vetting of our vessels, repairs related to unforeseen extraordinary events (as defined in our fixed fee management agreement) and insurance deductibles. For the year ended December 31, 2011, our vessel operating expenses amounted to approximately $35.5 million, of which $30.5 mil- lion was incurred under our management agreements with our manager and include $1.2 million in additional fees and costs relating 63 ANNUAL REPORT 2012 to certain costs associated with the vetting of our vessels, repairs related to unforeseen extraordinary events (as defined in our fixed fee management agreement) and insurance deductibles. Increases to vessel operating expenses are primarily attributable to increased costs due to the higher number of vessels in our fleet and the increased number of vessels managed under our floating fee management agreement. General and Administrative Expenses General and administrative expenses amounted to $9.2 million for the year ended December 31, 2012, as compared to $10.6 mil- lion for the year ended December 31, 2011. For the year ended December 31, 2012, without considering the expenses of $4.6 million incurred in connection with the preparation and execution of our acquisition of Crude Carriers during 2011 and the acquisition of the vessel owning company of the M/V Cape Agamemnon during 2011, we have recognized higher general and administrative expenses of $3.2 million mainly due to the full year results of operations of Crude Carriers’ expenses, including its equity compensation plan. General and administrative expenses include board of directors’ fees and expenses, audit fees, and other fees related to the expenses of the publicly traded partnership. Gain on sale of vessels to third parties During the year ended December 31, 2012 we sold the M/T Attikos and the M/T Aristofanis, the two small tankers in our fleet, to unrelated third parties recognizing a gain on sale of vessels of $1.3 million. This gain reflects the difference between the carrying val- ue of the vessels and the net selling proceeds at the time of the sale. Depreciation Depreciation of fixed assets amounted to $48.2 million for the year ended December 31, 2012, as compared to $37.2 million for the year ended December 31, 2011, primarily due to the full year consolidation of Crude Carriers’ vessels in our fleet. Depreciation is expected to increase if the number of vessels in our fleet increases. Vessels’ impairment charge Vessels’ impairment charge amounted to $43.2 million for the year ended December 31, 2012 and represents the difference between the carrying and the fair market value of the M/T Alexander the Great and the M/T Achilleas on the date they were exchanged for the M/V Archimidis and the M/V Agamemnon, respectively. There was no vessel impairment charge during the year ended December 31, 2011. Please see Note 5 (Vessels) to our Financial Statements included herein for more information on the vessels’ impairment charge. Total Other Expense, Net Total other expense, net for the year ended December 31, 2012, was approximately $24.4 million as compared to $30.6 million for the year ended December 31, 2011. The 2012 amount includes interest expense, amortization of financing charges, commitment fees and bank charges of $26.7 mil- lion, which was lower by $7.1 million than the respective 2011 amount due to the prepayment of $175.2 million of debt and the expi- ration and close out of eleven interest rate swap agreements. In addition the year ended December 31, 2012, reflects a gain of the twelve ineffective interest rate swap agreements of $1.5 million as compared to $2.3 million for the year ended December 31, 2011. Interest and other income amounted to $0.8 million as compared to $0.9 million for the year ended December 31, 2011. Net (Loss) / Income Net loss for the year ended December 31, 2012, amounted to $21.2 million as compared to net income of $87.1 million for the year ended December 31, 2011. For a list of factors which we believe are important to consider when evaluating our results, please refer to the discussion under “— Factors to Consider When Evaluating Our Results” and “— Results of Operations” above. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Results for the years ended December 31, 2011 and December 31, 2010 differ primarily due to the acquisition of Crude Carriers 64 ANNUAL REPORT 2012 and the costs associated with such acquisition as well as the increased voyage and operating expenses and the refinancing of the Crude Carriers’ outstanding debt. In addition, results of operations differ due to the acquisition of the vessel owning company of the M/V Cape Agamemnon and the weak results for tanker vessels on voyage charters during the year. The results of operations for the year ended December 31, 2010, have been retroactively adjusted and reflect the results of operations from the M/T Atrotos, and the M/T Alkiviadis for the periods that they were part of Capital Maritime’s fleet prior to their acquisition by us in March and June 2010, respectively. Total Revenues Time, voyage and bareboat charter revenues amounted to approximately $130.3 million for the year ended December 31, 2011, as compared to $124.6 million for the year ended December 31, 2010. The increase of $5.7 million is primarily attributable to the increased number of vessels in our fleet following our merger with Crude Carriers. For the year ended December 31, 2011, $31.8 million of total revenues represented charter hire received from Capital Maritime as compared to $11.0 million of total revenues for the year ended December 31, 2010. The increase of $20.8 million in charter hire received from Capital Maritime is attributable to the increased number of vessels in our fleet chartered with Capital Maritime for the period. Time, voyage and bareboat charter revenues are mainly comprised of the charter hire received from unaffiliated third-party customers and Capital Maritime and are affected by the number of days our vessels operate, the average number of vessels in our fleet and the charter rates. Please read “Item 4B: Business Overview—Our Fleet” and “—Our Charters” for information about the charters on our vessels, including daily char- ter rates. Voyage Expenses Voyage expenses amounted to $11.7 million for the year ended December 31, 2011, as compared to $7.0 million for the year end- ed December 31, 2010. The higher voyage expenses for 2011 were primarily due to the increased number of voyage charters compared to 2010. Voyage expenses are direct expenses to voyage revenues and primarily consist of commissions, port expenses, canal dues and bunkers. Voyage costs, except for commissions, are paid for by the charterer under time and bareboat charters. Voyage costs under voyage char- ters are paid for by the owner. Vessel Operating Expenses For the year ended December 31, 2011, our vessel operating expenses amounted to approximately $35.5 million, of which $30.5 mil- lion was incurred under our management agreements with our manager and include $1.2 million in additional fees and costs relating to certain costs associated with the vetting of our vessels, repairs related to unforeseen extraordinary events (as defined in our fixed fee management agreement) and insurance deductibles. For the year ended December 31, 2010, our vessel operating expenses amounted to approximately $31.3 million, of which $30.0 mil- lion was incurred under the management agreement with our manager and include $2.0 million in additional fees and costs relating to direct and indirect expenses incurred by Capital Ship Management in the management of our vessels, including, amongst others, cer- tain costs associated with the vetting of our vessels, repairs related to unforeseen extraordinary events and insurance deductibles. Ves- sel operating expenses for the year ended December 31, 2010, also include actual costs of $1.3 million incurred by the M/T Atrotos and the M/T Alkiviadis which were operated as part of Capital Maritime’s fleet prior to their acquisition by us in March and June 2010, respectively. Increases to vessel operating expenses are primarily attributable to increased costs due to the higher number of vessels in our fleet and the different structure of the management agreements under which such vessels are managed. General and Administrative Expenses General and administrative expenses amounted to $10.6 million for the year ended December 31, 2011, as compared to $3.5 mil- lion for the year ended December 31, 2010. The increase was mainly due to the increased expenses of $4.6 million incurred in con- nection with the preparation and execution of our acquisition of Crude Carriers and of the vessel owning company that owns the M/V Cape Agamemnon, $0.6 million reflecting Crude Carriers’ general and administrative expenses, $0.4 million reflecting the assump- tion of Crude’s Plan, as well as the $1.3 million reflecting higher equity compensation expense in connection with our Plan. General and administrative expenses include board of directors’ fees and expenses, audit fees, and other fees related to the expenses of the pub- licly traded partnership. 65 ANNUAL REPORT 2012 Depreciation Depreciation of fixed assets amounted to $37.2 million for the year ended December 31, 2011, as compared to $31.5 million for the year ended December 31, 2010, primarily due to the increased number of vessels in our fleet. The amount of depreciation for the year ended December 31, 2011 represents depreciation on 21 vessels for the whole year and on 6 vessels for part of the year. The amount of depreciation for the year ended December 31, 2010, represents depreciation on 20 ves- sels for the whole year and on one vessel for part of the year. Depreciation is expected to increase if the number of vessels in our fleet increases. Gain from Bargain Purchase Gain from bargain purchase amounted to $82.5 million for the year ended December 31, 2011. This amount represents: • The gain of $16.6 million we recorded in our consolidated statements of income for the year ended December 31, 2011 as a re- sult of the acquisition of vessel owning company of the M/V Cape Agamemnon on June 9, 2011; and • The gain of $65.9 million we recorded in our consolidated statements of income for year ended December 31, 2011 as a result of the acquisition of Crude Carriers. Please see Note 3 (Acquisitions) to our Financial Statements included herein for more information on the gain from bargain pur- chase. Total Other Expense, Net Total other expense, net for the year ended December 31, 2011, was approximately $30.6 million as compared to $32.4 million for the year ended December 31, 2010. The 2011 amount includes interest expense, amortization of financing charges and bank charges of $33.8 which was higher by $0.6 million of the respective 2010 amount due to the increase of our debt. In addition the year ended December 31, 2011, reflects a gain of the eight ineffective interest rate swap agreements of $2.3 million. Interest and other income remained unchanged at $0.9 million for both years. These eight interest rate swap agreements will continue to impact our net income until their expiration in June 2012. Net Income Net income for the year ended December 31, 2011, amounted to $87.1 million as compared to $18.9 million for the year ended De- cember 31, 2010. For a list of factors which we believe are important to consider when evaluating our results, please refer to the dis- cussion under “— Factors to Consider When Evaluating Our Results” and “— Results of Operations” above. B. Liquidity and Capital Resources As at December 31, 2012, total cash and cash equivalents were $43.6 million, restricted cash was $10.5 million, and total liquidity including cash and undrawn long-term borrowings was $109.5 million. As at December 31, 2011, total cash and cash equivalents were $53.4 million, restricted cash was $6.8 million, and total liquidity including cash and undrawn long-term borrowings was $164.8 million. We anticipate that our primary sources of funds for our liquidity needs will be cash flows from operations. As our vessels come up for rechartering, depending on the prevailing market rates, we may not be able to recharter them at levels similar to their cur- rent charters which may affect our future cash flows from operations. Generally, our long-term sources of funds will be from cash from operations, long-term bank borrowings and other debt or equity financings. Because we distribute all of our available cash, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity se- curities, to fund acquisitions and expansion and investment capital expenditures, including opportunities we may pursue under the amended and restated omnibus agreement with Capital Maritime or acquisitions from third parties. We currently have no capital commitments to purchase or build additional vessels. However, as discussed above, we expect to continue to evaluate opportuni- ties to acquire vessels and businesses and expect that the size and composition of our fleet will change over time. In connection with evaluating and pursuing these opportunities and as we seek to optimize our capital structure, we may also evaluate and pur- sue financing opportunities. As at December 31, 2012, and following the cancellation of an undrawn tranche of $52.5 million under our 2008 credit facility in 66 ANNUAL REPORT 2012 connection with the issuance and sale of our Class B Units, we had $55.4 million in undrawn amounts under our credit facilities as compared to $111.4 million in undrawn amounts as at December 31, 2011. Total Partners’ Capital as of December 31, 2012, amounted to $573.8 million, which reflects an increase of $56.5 million from the year ended December 31, 2011. This change consisted of: • • • • • an increase of $136.4 million from the net proceeds from the issuance of the 15,555,554 Class B Units; an increase of $3.8 million from our equity compensation plan; an increase of $10.8 million attributable to unrealized gain on derivative instruments; a decrease of $73.3 million attributable to our distributions to our unit holders; and a decrease of $21.2 million reflecting our net loss for the year ended December 31, 2012. Notwithstanding the recent global economic downturn and subject to shipping, charter and financial market developments, we be- lieve that our working capital will be sufficient to meet our existing liquidity needs for at least the next 12 months. Cash Flows Our cash flow statements, • • for the period from January 1, 2010 to February 28, 2010 for the M/T Atrotos; and for the period from January 1, 2010 to June 29, 2010 for the M/T Alkiviadis, reflect the operations of Capital Maritime, and include expenses incurred by Capital Maritime while operating the vessels currently in our fleet, including expenses associated with drydocking of the vessels, voyage expenses, repayment of loans and the incurrence of indebtedness for the periods that our vessels were operated as part of Capital Maritime’s fleet, as well as certain payments made by Capital Maritime to shipyards prior to the delivery of the relevant vessel. Please see the “Vessels Included in Our Financial Statements and Acquisition Data” table included in “—Factors to Consider When Evaluating Our Results” above for additional information. The following table summarizes our cash and cash equivalents provided by / (used in) operating, financing and investing activi- ties for the years presented in millions: Net Cash Provided by Operating Activities Net Cash Provided by / (Used in) Investing Activities Net Cash (Used in) / Provided by Financing Activities 2012 $84.8 $15.9 $(110.6) 2011 $56.5 $(16.7) $(19.0) 2010 $50.1 $(79.2) $58.1 Net Cash Provided by Operating Activities Net cash provided by operating activities increased to $84.8 million for the year ended December 31, 2012 from $56.5 million for the year ended December 31, 2011 due to the full year consolidation of Crude Carriers’ vessels and the reduced interest costs due to the repayment of debt and the expiration of certain interest rate swap contracts. Net cash provided by operating activities in- creased to $56.5 million for the year ended December 31, 2011 from $50.1 million for the year ended December 31, 2010 as the fleet increased in size following the acquisition of Crude Carriers and the vessel owning company of the M/V Cape Agamemnon. For an explanation of why our historical net cash provided by operating activities is not indicative of net cash provided by operat- ing activities to be expected in future periods, please read “—Factors to Consider when Evaluating our Results” and “— Results of Operations” above. Net Cash Provided by/(Used in) Investing Activities Cash is used primarily for vessel acquisitions and changes in net cash used in investing activities are primarily due to the number of vessels acquired in the relevant period. We expect to rely primarily upon external financing sources, including bank borrowings and the issuance of debt and equity securities as well as cash in order to fund any future vessels acquisitions or expansion and invest- ment capital expenditures. For the year ended December 31, 2012, net cash provided by investing activities was $15.9 million and was comprised of: • $21.3 million, of which $19.7 million represent the net proceeds from the sale of the M/T Attikos and the M/T Aristofanis to 67 ANNUAL REPORT 2012 unrelated third parties and $1.6 million represent proceeds received in connection with the exchange of the M/T Alexander the Great for the M/V Archimidis; $3.8 million, representing the increase to our restricted cash following the conversion of the 2007 credit facility to a term loan. Restricted cash is the minimum amount of free cash we were required to maintain under our credit facilities for the pe- riod; $1.4 million, representing the cash consideration in connection with the exchange of the M/T Achilleas for the M/V Agamem- non; and $0.2 million, representing the amounts paid for upgrading certain vessels. • • • For the year ended December 31, 2011, net cash used was $16.7 million and was comprised of: • • • $27.0 million, primarily representing the amount we paid to Capital Maritime for the acquisition of the vessel owning compa- ny of the M/V Cape Agamemnon; $11.8 million, representing the cash and cash equivalents acquired in the acquisition of Crude Carriers at the time of the clos- ing of the merger; and $1.5 million, representing the increase to our restricted cash which is the minimum amount of free cash we were required to maintain under our credit facilities for the period, due to the acquisitions of the M/V Cape Agamemnon and the five crude tankers of Crude Carriers. For the year ended December 31, 2010, net cash used was $79.2 million and was comprised of: • Vessel acquisitions and acquisition of above market bare-boat charter of $108.8 million which is analyzed as follows: • $64.1 million, representing the net book value of the two vessels acquired during 2010 (the M/T Atrotos and the M/T Alkiviadis) at their respective delivery dates; • $43.5 million, representing the amount we paid to our sponsor Capital Maritime for the acquisition of M/T Assos together with the bare boat charter that was attached to the vessel; • • • $0.9 and $0.3 million, representing the amounts paid for upgrading the M/T Attikos and the M/T Aristofanis, respectively; $0.8 million representing the increase to our restricted cash which is the minimum amount of free cash we were required to main- tain under our credit facilities for the period, due to the acquisitions of the M/T Atrotos, M/T Alkiviadis and M/T Assos; and $81.7 million and $112.1 million, representing purchases of short term investments and maturities of short term investments, respectively. Net Cash (Used in) / Provided by Financing Activities Net cash used in financing activities amounted to $110.6 million for the year ended December 31, 2012, as compared to net cash used in financing activities of $19.0 million for the year ended December 31, 2011. For the year ended December 31, 2010, net cash provided by financing activities amounted to $58.1 million. For the year ended December 31, 2012, proceeds from the sale and issuance of our Class B Units amounted to $140.0 million. Total expenses paid in connection with the sale and issuance of Class B Units were $1.7 million. For the year ended December 31, 2011, proceeds from issuance of our units amounted to $1.5 million. This amount represents the cash contribution that our general partner made to us in order to maintain its 2% interest in us following the acquisition of the vessel owning company of the M/V Cape Agamemnon. During the year ended December 31, 2010, we successfully completed two follow-on offerings receiving proceeds of $105.3 million after the deduction of the underwriters’ commissions. Total expenses paid in connection with these two offerings were $1.5 million. For the year ended December 31, 2012, there were no proceeds from the issuance of long term debt. During 2012 we pre-paid $175.2 million in debt in connection with the issuance and sale of the Class B Units, the sale of the M/T Attikos and the M/T Aristo- fanis, and the 2012 Vessel Sale. For the year ended December 31, 2011, proceeds from issuance of long term debt amounted to $159.6 million. This amount represents the draw downs of $134.6 and $25.0 million we made under the 2008 and 2011 credit fa- cilities, respectively. We used the $134.6 million to repay Crude Carriers’ outstanding loan at the time of the completion of the acquisition and the $25.0 million for the partial finance of the acquisition of the shares of the vessel owning company of the M/V Cape Agamemnon. There were no proceeds from the issuance of long-term debt or payments of long term debt for the year end- ed December 31, 2010. There were no proceeds from related party debt for the year ended December 31, 2012, 2011 and 2010. 68 ANNUAL REPORT 2012 There were no payments of related party-debt/financing for the year ended December 31, 2012 and 2011. Payments of related par- ty-debt/financing for the year ended December 31, 2010, amounted to $1.6 million, reflecting the debt related to the M/T Atrotos and the M/T Alkiviadis. For each of the years ended December 31, 2012 and 2011 loan issuance costs amounted to $0.3 million. For the year ended De- cember 31, 2010, there were no loan issuance costs. During the first and the second quarter of 2010 we acquired two vessels from Capital Maritime, the M/T Atrotos and the M/T Alkiviadis, for a total purchase price of $74.5 million which represented an excess of $10.4 million over the net book value of these vessels re- flected in our financial statements. For the years ended December 31, 2012, 2011 and 2010 there were no capital contributions by Capital Maritime. During the year ended December 31, 2012, we made distributions, including to our Class B unitholders and to Capital Maritime, of $73.3 million. During the year ended December 31, 2011, we made distributions of $45.1 million to our common unitholders, in- cluding Capital Maritime, compared to $33.7 million in distributions for the year ended December 31, 2010. Borrowings Our long-term third party borrowings are reflected in our balance sheet as “Long-term debt” and as current liabilities in “Current portion of long-term debt.” As of December 31, 2012, long term debt was $458.4 million consisting of: (i) $250.9 million outstanding under the 2007 credit facility, (ii) $188.5 outstanding under the 2008 credit facility, and (iii) $19.0 million outstanding under the 2011 credit facility. Long term debt as of December 31, 2011 was $615.3 million. The current portion of long term debt for the year ended December 31, 2012 was $0 as compared to $18.3 million for the year ended December 31, 2011. Our Credit Facilities We have entered into three non-amortizing credit facilities. In March 2007, we entered into a loan agreement with a syndicate of financial institutions including HSH Nordbank AG for a re- volving credit facility, of up to $370.0 million for the financing of the acquisition cost, or part thereof, of up to 15 MR product tankers. Following the sale of the M/T Attikos and the M/T Aristofanis during the first half of 2012 we repaid $20.5 million under this credit facility. In connection with the issuance and sale of our Class B Units, we prepaid $95.2 million and entered into an amendment which provides for the conversion of the 2007 credit facility into a term loan, the deferral of scheduled amortization payments until March 2016 and the repayment of the facility in six equal consecutive quarterly installments commencing in March 2016 plus a balloon pay- ment due in June, 2017.The interest margin of this facility, as amended, is 2.0%. In March 2008, we entered into a loan agreement with a syndicate of financial institutions including HSH Nordbank AG for a non- amortizing credit facility of up to $350.0 million for the partial financing of vessel acquisitions by us. In September 2011, following the acquisition of Crude Carriers, we completed the refinancing of Crude Carrier’s outstanding debt of $134.6 million using this fa- cility. In connection with the refinancing, the M/T Alexander the Great, the M/T Achilleas, the M/T Miltiadis M II, and the M/T Aias were added as collateral to the facility. In connection with the issuance and sale of our Class B Units, we prepaid $48.4 million and entered into an amendment which provides for the deferral of scheduled amortization payments until March 2016 and the repayment of the facility in nine equal consecutive quarterly installments commencing in March 2016 plus a balloon payment due in March 2018. In addition, an undrawn tranche of $52.5 million under the 2008 facility was cancelled. Following the 2012 Vessel Sale we prepaid an additional $5.2 million and the M/V Archimidis and the M/V Agamemnon replaced the M/T Alexander the Great and the M/T Achil- leas as collateral under the facility. The interest margin of this facility, as amended, is 3.0%. Loan commitment fees are calculated at 0.325% per annum on any undrawn amount and are paid quarterly. In June 2011, we entered into a loan agreement with Credit Agricole Emporiki Bank for a credit facility of $25.0 million to par- tially finance the acquisition of vessel owning company of the M/V Cape Agamemnon from Capital Maritime. In connection with the issuance and sale of our Class B Units, we prepaid $6.0 million and entered into an amendment which provides for the deferral of sched- uled amortization payments until March 2016 and the repayment of the facility in nine equal consecutive quarterly installments com- mencing in March 2016 and a balloon payment due in March 2018. All our credit facilities contain customary ship finance covenants, including restrictions as to: changes in management and own- 69 ANNUAL REPORT 2012 ership of the mortgaged vessels, the incurrence of additional indebtedness, the mortgaging of vessels, the ratio of EBITDA to net in- terest expenses shall be no less than 2:1, minimum cash requirement of $500,000 per vessel of which 50% may be constituted by un- drawn commitments under the applicable credit facility, as well as the ratio of net total indebtedness to the aggregate market value of the total fleet shall not exceed 0.725:1. Our credit facilities also contain a collateral maintenance requirement according to which the aggregate average fair market value of the collateral vessels shall be no less than 125% of the aggregate outstanding amount under these facilities. Furthermore, the vessel owning companies may pay dividends or make distributions when no event of default has occurred and the payment of such dividend or distribution has not resulted in a breach of any of the financial covenants. The credit facilities have a general assignment of the earnings, insurances and requisition compensation of the respective vessel or vessels. Each also requires additional security, including: pledge and charge on current account; corporate guarantee from each of the twenty-five vessel-owning companies, and mortgage interest insurance. Our obligations under our credit facilities are secured by first-priority mortgages covering our vessels and are guaranteed by each vessel owning company. Our credit facilities contain a “Market Disruption Clause” requiring us to compensate the banks for any in- creases to their funding costs caused by disruptions to the market which the banks may unilaterally trigger. For the years ended De- cember 31, 2012, 2011 and 2010 we incurred an additional interest expense in the amount of $0.4, $1.3 and $1.5 million, respective- ly, due to the “Market Disruption Clause”. As at December 31, 2012, the amounts drawn down under our three credit facilities were as follows: Date Vessel / Entity 07/13/2007 M/T Akeraios 09/20/2007 M/T Apostolos 09/28/2007 M/T Anemos I 01/29/2008 M/T Alexandros II 03/27/2008 M/T Amore Mio II 04/30/2008 M/T Aristofanis 06/17/2008 M/T Aristotelis II 08/20/2008 M/T Aris II M/V Cape Agamemnon 06/09/2011 Crude Carriers Corp. and its subsidiaries 09/30/2011 Total $ $ 370.0 Credit Facility 46.9 56.0 56.0 48.0 - - 20.0 24.0 - - 250.9 $ $ Expressed in Millions $ 350.0 Credit Facility - - - - 46.0 11.5 - 1.6 - 129.4 188.5 $ $ $ 25.0 Credit Facility - - - - - - - - 19.0 - 19.0 $ As at December 31, 2012, we had $55.4 million in undrawn amounts under our credit facilities and were in compliance with all fi- nancial debt covenants. Our ability to comply with the covenants and restrictions contained in our credit facilities and any other debt instruments we may enter into in the future may be affected by events beyond our control, including prevailing economic, financial and industry conditions, including interest rate developments, changes in the funding costs of our banks and changes in asset valua- tions. 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, we are unlikely to be able to make any distributions to our unitholders, 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 ad- dition, obligations under our credit facilities are secured by our vessels, and if we are unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets. Furthermore, any contemplated vessel acquisitions will have to be at levels that do not impair the required ratios set out above. The recent global economic downturn has had an adverse effect on vessel values which is likely to persist if the economic slowdown re- sumes. If the estimated asset values of the vessels in our fleet continue to decrease, such decreases may limit the amounts we can draw- down under our credit facilities to purchase additional vessels and our ability to expand our fleet. In addition, we may be obligated to pre-pay part of our outstanding debt in order to remain in compliance with the relevant covenants in our credit facilities. A decline in the market value of our vessels could also lead to a default under any prospective credit facility to which we become a party, affect our ability to refinance our credit facilities and/or limit our ability to obtain additional financing. An increase/decrease of 10% of the aggregate fair market values of our vessels would not cause any violation of the total indebtedness to aggregate market value covenant contained in our credit facilities. 70 ANNUAL REPORT 2012 As of December 31, 2012, the following interest rate swap agreements were in place: $350.0 million 2008 credit facility Currency Notional Amount (million) USD USD USD 46.0 11.5 1.6 Fixed Rate 3.525% 3.895% 4.099% Trade Date Value Date 03.25.2008 04.24.2008 08.14.2008 03.27.2008 04.30.2008 08.20.2008 Maturity Date 03.27.2013 03.28.2013 03.28.2013 E. Off-Balance Sheet Arrangements As of the date of this Annual Report, we have not entered into any off-balance sheet arrangements. F. Contractual Obligations and Contingencies The following table summarizes our long-term contractual obligations as of December 31, 2012 (in thousands of U.S. Dollars). Long-term Debt Obligations Interest Obligations (1)(2) Management fee (3) Commercial services fee (4) Total: Total $ 458,365 67,601 37,784 639 $ 564,389 Payment due by period Less than 1 year $ $ - 11,772 13,134 327 $ 25,233 $ 1-3 years - 28,002 14,177 312 42,491 3-5 years $ 321,688 26,136 7,244 - $ 355,068 More than 5 years 136,677 $ 1,691 3,229 - 141,597 $ (1) (2) (3) (4) For our 2007 and 2011 credit facilities calculations for interest obligations have been based on Bloomberg forward rates plus a mar- gin of 2% and 3.25% respectively which reflects our best estimates. For our 2008 credit facility, calculations for interest obligations, upon the expiration of the interest rate swap agreements in March 2013 for the swapped drawn down amount of $59.1 million, have been based on Bloomberg forward rates plus a margin of 3% which reflects our best estimates. For the remaining drawn down amount of $129.4 million calculations for interest obligations have been based on Bloomberg forward rates plus a margin of 3% which reflects our best estimates. The fees payable to Capital Ship Management represent fees for the provision of commercial and technical services such as crew- ing, repairs and maintenance, insurance, stores, spares and lubricants, provided pursuant to our management agreements. Management fees under the floating fee and Crude Carriers management agreements have been increased annually based on the United States Consumer Price Index for November 2012. Represents commercial services fee equal to 1.25% on gross time charter revenues to be generated by the vessels managed under the Crude Carriers management agreement which were under long term time charters as of December 31, 2012. Assumes the full exercise by Capital Maritime of its option to extend the charter on the M/T Aias and the M/T Amoureux, for an additional year. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon our Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The prepa- ration of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies that involve a higher degree of judgment and the methods of their application. For a description of all of our significant accounting poli- cies, see Note 2 (Significant Accounting Policies) to our Financial Statements included herein for more information. 71 ANNUAL REPORT 2012 Vessel Lives and Impairment The carrying value of each of our vessels represents its original cost (contract price plus initial expenditures) at the time of delivery or purchase less accumulated depreciation or impairment charges. The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. However, in recent years, market conditions have changed significantly as a result of the credit crisis and resulting slow- down in world trade. Charter rates for vessels have decreased and vessel values have been affected. We consider these market develop- ments as indicators of potential impairment of the carrying amount of our assets. We performed undiscounted cash flow tests as of De- cember 31, 2012 and 2011, as an impairment analysis, in which we made estimates and assumptions relating to determining the project- ed undiscounted net operating cash flows by considering the following: • • • • • • • • the charter revenues from existing time charters for the fixed fleet days (our remaining charter agreement rates); vessel operating expenses; dry-docking expenditures; an estimated gross daily time charter equivalent for the unfixed days (based on the 10-year average historical one year Time Char- ter Equivalent) over the remaining economic life of each vessel, excluding days of scheduled off-hires; residual value of vessels; fixed commercial and technical management fees, assuming an annual increase of 2%; a utilization rate of 98.6% based on the fleet’s historical performance; and the remaining estimated life of our vessels. Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their currently low levels or whether they will improve by any significant degree. Charter rates may remain at depressed levels for some time which could adversely affect our revenue and profitability, and future assessments of vessel impairment. Our assumptions consider historical trends and our accounting policies are as follows: • • • • • • • in accordance with the prevailing industry standard, depreciation is calculated using an estimated useful life of 25 years for our vessels, commencing at the date the vessel was originally delivered from the shipyard; estimated useful life of vessels takes into account design life, commercial considerations and regulatory restrictions based on our fleet’s historical performance; estimated charter rates are based on rates under existing vessel contracts and thereafter at market rates at which we expect we can re-charter our vessels based on market trends; estimates of vessel utilization, including estimated off-hire time and the estimated amount of time our vessels may spend operat- ing on the spot market, based on the historical experience of our fleet; estimates of operating expenses and dry-docking expenditures are based on historical operating and dry-docking costs based on the historical experience of our fleet and our expectations of future inflation and operating requirements; vessel residual values are a product of a vessel’s lightweight tonnage and an estimated scrap rate of $180; and the remaining estimated lives of our vessels used in our estimates of future cash flows are consistent with those used in our de- preciation calculations. The impairment test that we conduct is most sensitive to variances in future time charter rates. Based on the sensitivity analysis per- formed for December 31, 2012, we would begin recording impairment on the first vessel that will incur impairment by vessel type for time charter declines from their 10 year historical averages as follows: Percentage Decline from which Impairment would be Recorded Year ended December 31, 2012 Year ended December 31, 2011 Vessel Product tankers Suezmax vessels* Cape vessel *For the year ended December 31, 2011, also includes our VLCC vessels 28.2% 30.2% 70.2% 19.2% 36.7% 62.9% As of December 31, 2012 and February 5, 2013, our current rates for time charters on average were below their 10 year historical averages as follows: 72 ANNUAL REPORT 2012 Time Charter Rates as Compared with 10-year Historical Average (as percentage above/(below) As of December 31, 2012 As of February 5, 2013 (11.6)% (35.0)% (16.2)% (14.8)% (35.0)% (16.2)% Vessel Product tankers Suezmax vessels Cape vessel Based on the above assumptions we determined that the undiscounted cash flows support the vessels’ carrying amounts as of Decem- ber 31, 2012 and 2011. The impairment of $43.2 million we recorded for the year ended December 31, 2012 was the result of the 2012 Ves- sel Sale. Please also read “Item 4B: Business Overview — Comparison of Possible Excess of Carrying Value Over Estimated Charter-Free Mar- ket Value of Certain Vessels” above for additional information. Interest Rate Swap Agreements We designate our derivatives based upon the criteria established by the FASB in its accounting guidance for derivatives and hedging activities. The accounting guidance for derivatives requires that an entity recognize all derivatives as either assets or liabilities in the state- ment of financial position and measure those instruments at fair value. The accounting for the changes in the fair value of the derivative de- pends on the intended use of the derivative and the resulting designation. For a derivative that does not qualify as a cash flow hedge, the change in fair value is recognized at the end of each accounting period in the income statement. For a derivative that qualifies as a cash flow hedge, the change in fair value is recognized at the end of each reporting period in accumulated other comprehensive income/ (loss) (ef- fective portion) until the hedged item is recognized in income. The ineffective portion of a derivative’s change in fair value is immediate- ly recognized in the income statement. We discontinue cash flow hedge accounting if the hedging instrument expires, is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or we revoke the designation. At that point in time, any cumulative gain or loss on the hedging instrument recognized in equity is kept in Partners’ capital until the forecasted transaction occurs. When the forecasted transaction occurs, any cumu- lative gain or loss on the hedging instrument is recognized in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognized in Partners’ capital is transferred to net profit or loss for the year as financial income or expense. Three of our initial fourteen interest rate swap agreements remain active until their expiration date in March 2013. An increase in in- terest rates will have a negative effect while a decrease in interest rates will have a positive effect, on the fair value of our interest rate swap agreements. Please see Note 2 (Significant Accounting Policies) and Note 8 (Financial Instruments) to our Financial Statements included herein for more detailed information. Intangible assets We record all identified tangible and intangible assets or any liabilities associated with the acquisition of a business at fair value. When a business is acquired that owns a vessel with an existing charter agreement, we determine the present value of the difference between: (i) the contractual charter rate and (ii) the prevailing market rate for a charter of equivalent duration. When determining present value we use Weight- ed Average Cost of Capital which includes judgements such as size and risks premiums and is appropriate in relation to the business, in- dustry and environment in which we operate. The resulting above-market (assets) and below-market (liabilities) charters are amortized us- ing straight line method as a reduction and increase, respectively, to revenues over the remaining term of the charters. In accordance with the guidance related to Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate the potential impairment of the iden- tified acquired intangible assets when there are indicators of impairment. The identified intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable based on estimates of future undiscounted cash flows. In the event of impairment, the asset is written down to its fair value. An impairment loss, if any, is measured as the amount by which the carrying amount of the asset exceeds its fair value. No impairment loss was recognized during any period presented. Recent accounting pronouncements Please see Note 2(v) (Significant Accounting Policies - Recent Accounting Pronouncements) to our Financial Statements included herein. 73 ANNUAL REPORT 2012 Item 6. Directors, Senior Management and Employees. Management of Capital Product Partners L.P. Pursuant to our partnership agreement, our general partner has delegated to our board of directors the authority to oversee and di- rect our operations, management and policies on an exclusive basis, and such delegation is binding on any successor general partner of the partnership. Our general partner, Capital GP L.L.C., a Marshall Islands limited liability company wholly owned by Capital Mar- itime, manages our day-to-day activities consistent with the policies and procedures adopted by our board of directors. Our board of directors initially consisted of seven persons, three persons who were designated by our general partner in its sole discretion and four who were elected by the common unitholders. Following the completion of our merger with Crude Carriers in Sep- tember 2011, the size of our board has been increased to eight persons, with five to be elected by our common unitholders going for- ward. Following completion of the merger, Dimitris P. Christacopoulos was elected to our board of directors. Directors appointed by our general partner serve as directors for terms determined by our general partner and directors elected by our common unitholders are divided into three classes serving staggered three-year terms. The initial four directors appointed by Capital Maritime at the time of our IPO were designated as Class I, Class II and Class III elected directors. As of the 2010 annual meeting of unitholders, a major- ity of our board is now elected by our common unitholders (excluding common units held by Capital Maritime) rather than appoint- ed by Capital Maritime. At each annual meeting of unitholders, directors are elected to succeed the class of directors whose terms have expired by a plurality of the votes of the common unitholders (excluding common units held by Capital Maritime and its affiliates). Directors elected by our common unitholders may be nominated by the board of directors or by any limited partner or group of limit- ed partners that holds at least 10% of the outstanding common units. Our general partner intends to cause its officers to devote as much time to the management of our business and affairs as is nec- essary for the proper conduct of our business and affairs. Our general partner’s Chief Executive Officer and Chief Financial Officer, Ioannis E. Lazaridis, allocates his time between managing our business and affairs and the business and affairs of Capital Maritime. The amount of time Mr. Lazaridis allocates between our business and the businesses of Capital Maritime varies from time to time de- pending on various circumstances and needs of the businesses, such as the relative levels of strategic activities of the businesses. Our general partner owes a fiduciary duty to our unitholders and is liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are expressly non-recourse to it. Whenever possible, the part- nership agreement directs that we should incur indebtedness or other obligations that are non-recourse to our general partner. Officers of our general partner and other individuals providing services to us or our subsidiaries may face a conflict regarding the allocation of their time between our business and the other business interests of Capital Maritime. Our partnership agreement limits our general part- ner’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. Please read “Item 3D: Risk Factors—Our partnership agreement limits the fiduciary duties of our gen- eral partner and our directors to our unitholders and restricts the remedies available to unitholders for actions taken by our general part- ner or our directors” for a more detailed description of such limitations. 74 ANNUAL REPORT 2012 A. Directors and Senior Management Set forth below are the names, ages and positions of our directors and director nominees and our general partner’s executive offi- cers as of January 31, 2013. Name Evangelos M. Marinakis (1) Ioannis E. Lazaridis (1) Nikolaos Syntychakis (1) Pierre de Demandolx-Dedons (2) Abel Rasterhoff (3) Evangelos G. Bairactaris (4) Keith Forman (4) Dimitris P. Christacopoulos (3) Age 45 45 50 72 72 41 54 42 Position Director and Chairman of the Board Director and Chief Executive Officer and Chief Financial Officer of our general partner Director Director (5) Director (5) Director and Secretary Director (5) Director (5) (1) (2) (3) (4) (5) Appointed by our general partner (term expires in 2013). Class I director (term expires in 2014). Class II director (term expires in 2015). Class III director (term expires in 2013). Member of our audit committee and our conflicts committee. Biographical information with respect to each of our directors, our director nominees and our general partner’s executive officers is set forth below. The business address for our directors and executive officers is 3 Iassonos Street Piraeus, 18537 Greece. Evangelos M. Marinakis, Director and Chairman of the Board. Mr. Marinakis joined our board of directors on March 13, 2007 and serves as the Chairman of the Board. Mr. Marinakis has served as Capital Maritime’s President and Chief Executive Officer and as a director since its incorporation in March 2005. Mr. Marinakis served as Chairman and Chief Executive Officer of NYSE-listed Crude Carriers Corp., an affiliate of Capital Maritime, since March 2010 until its merger with us in September 2011. From 1992 to 2005, Mr. Marinakis was the Commercial Manager of Capital Ship Man- agement and oversaw the businesses of the group of companies that currently form Capital Maritime. For the past 20 years, Mr. Mari- nakis has also been active in various other family businesses, all related to the shipping industry. Mr. Marinakis holds a B.A. in Inter- national Business Administration and an M.Sc in International Relations. Ioannis E. Lazaridis, Director and Chief Executive and Chief Financial Officer. Mr. Lazaridis has served as the Chief Executive and Chief Financial Officer of our general partner since its formation in January 2007 and joined our board of directors on March 13, 2007. Mr. Lazaridis served as President of NYSE-listed Crude Carriers Corp., an affiliate of Capital Maritime, since March 2010 until its merger with us in September 2011, and has also served as Capital Maritime’s Chief Financial Officer and as a director since its incorporation in March 2005. From 2004 to March 2005, Mr. Lazaridis was employed by our predecessor companies. From 1996 to 2004, Mr. Lazaridis was employed by Credit Agricole Indosuez Cheuvreux in London, where he worked in the equity department. From 1993 to 1996, Mr. Lazaridis was employed by Kleinwort Benson in equity sales and from 1990 to 1993 was employed by Norwich Union Investment Management. Mr. Lazaridis holds a B.A. degree in economics from the University of Thessaloniki in Greece and an M.A. in Finance from the University of Reading in the UK. He is also an Associate for the Institute of Investment Management and Research in the UK. Evangelos G. Bairactaris, Director and Secretary. Mr. Bairactaris joined our board of directors on March 13, 2007 and has served as our Secretary since our formation in January 2007. Mr. Bairactaris is a Greek attorney at law and a member of the Piraeus Bar Association. Mr. Bairactaris has been a partner in G.E. Bairactaris & Partners since 2000 and has acted as managing partner since 2003. He has regularly provided his professional serv- ices to our predecessor companies and many Greek and international shipping companies and banks. Mr. Bairactaris is currently a di- rector of Hellenic Seaways Maritime S.A., one of the largest coastal passenger and cargo transportation services company operating in Greece and Italy. The law firm of G.E. Bairactaris & Partners has provided, and may continue to provide, legal services to us and to Capital Maritime and its affiliates. 75 ANNUAL REPORT 2012 Nikolaos Syntychakis, Director. Mr. Syntychakis joined our board of directors on April 3, 2007. Mr. Syntychakis, Managing Director of Capital Ship Man- agement, joined Capital Ship Management in January 2001 where he has served as Vetting Manager, Crew Manager and Oper- ations Manager. From 2000 to 2001, Mr. Syntychakis served as Fleet Operator of Delfi S.A. in Piraeus, Greece and from 1988 to 1999 he worked as the Chief Officer and DPA of Sougerka Maritime also in Piraeus, Greece. Mr. Syntychakis has been in- volved in the shipping industry in various capacities for over 25 years and has also been closely involved with vetting matters, serving on Intertanko’s Vetting Committee for several years. Abel Rasterhoff, Director. Mr. Rasterhoff joined our board of directors on April 3, 2007. He serves on our conflicts committee and has been designat- ed as the audit committee’s financial expert. Mr. Rasterhoff joined Shell International Petroleum Maatschappij in 1967, and worked for various entities of the Shell group of companies until his retirement from Shell in 1997. From 1981 to 1984, Mr. Rasterhoff was Managing Director of Shell Tankers B.V., Vice Chairman and Chairman-elect of the Dutch Council of Shipping and a Mem- ber of the Dutch Government Advisory Committee on the North Sea. From 1991 to 1997, Mr. Rasterhoff was Director and Vice President Finance and Planning for Shell International Trading and Shipping Company Limited. During this period he also served as a Board Member of the Securities and Futures Authority (SFA) in London. From February 1998 to 2004, Mr. Rasterhoff has served as a member of the executive board and as Chief Financial Officer of TUI Nederland, the largest Dutch tour operator. From February 2001 to September 2001, Mr. Rasterhoff served as a member of the executive board and as Chief Financial Officer of Connexxion, the government owned public transport company. Mr. Rasterhoff was also on the Supervisory Board of SGR and served as an advisor to the trustees of the TUI Nederland Pension Fund. Mr. Rasterhoff served on the Capital Maritime Board from May 2005 until his resignation in February 2007 as the chairman of the audit committee. Mr. Rasterhoff also served as a director and audit committee member of Aegean Marine Petroleum Network Inc., a company listed on the New York Stock Ex- change (“NYSE”) from December 2006 to May 2012. Mr. Rasterhoff holds a graduate business degree in economics from Gronin- gen State University. Keith Forman, Director. Mr. Forman joined our board of directors on April 3, 2007 and serves on our conflicts committee and our audit committee. Mr. Forman was, until March 31, 2010, a Partner and served as Chief Financial Officer of Crestwood Midstream Partners. Crest- wood Midstream was a private investment partnership focused on making equity investments in the midstream energy mar- ket. Crestwood’s other partners included the Blackstone Group, Kayne Anderson and GSO Capital. From January 2004 to July 2005, he was Senior Vice President, Finance for El Paso Corporation, a leading provider of natural gas services. Mr. Forman, who joined El Paso in 1998 upon their acquisition of the general partner of the Leviathan Gas Pipeline Partners, also served as Vice Presi- dent from 2001 to 2003, of El Paso Field Services and from 1992 to 2003 he served as Chief Financial Officer of GulfTerra En- ergy Partners L.P., a publicly traded master limited partnership. In May 2012, Mr. Forman became a Senior Advisor to Industry Funds Management, an Australian based fund manager that invests in infrastructure projects world-wide. Since November 2011, Mr. Forman has served as an independent director of New York Stock Exchange listed Rentech Nitrogen Partners, a publicly trad- ed master limited partnership engaged in the manufacture of fertilizer products, where he serves on both the audit and conflict committees. Pierre de Demandolx-Dedons, Director. Mr. de Demandolx Dedons joined our board of directors on November 15, 2011 and served on our conflicts committee and our audit committee. Mr. de Demandolx Dedons has been involved in the shipping industry in various capacities for over forty years and since 1997 has been primarily a shipping consultant. From 1984 to 1997, Mr. de Demandolx Dedons was employed by Groupe WORMS & Cie, a French financial, insurance and transportation company, where he held several positions in the organization, including Deputy General Manager of Cie Navale Worms (which became Compagnie Nationale De Navigation in 1986) and Gen- eral Manager in charge of Finance—Tankers and Offshore, a position he held from 1991 to 1996. From 1986 to 2004, Mr. de De- mandolx Dedons was a member of the board of directors of UK P&I Clubs. Prior to this involvement, from 1975 to 1984, Mr. de Demandolx Dedons was active in the French Shipowners’ Association in Paris, serving as its Deputy General Manager from 1975 to 1977 and as its General Manager from 1977 to 1984. During this time he was active on the boards of ICS and ISF. From 1965 to 1975 he was a civil servant in the French Ports Authorities. He currently sits on a number of boards of directors both in Europe 76 ANNUAL REPORT 2012 and the United States, including Seacor Holdings Inc., a company listed on the NYSE. Prior to joining our board of directors, Mr. de Demandolx Dedons served as a director of Crude Carriers Corp. and Capital Maritime & Trading Corp. Dimitris P. Christacopoulos, Director. Mr. Christacopoulos, joined our board of directors on September 30, 2011, following our merger with NYSE listed Crude Car- riers Corp., where he had served as a director since 2010. Mr. Christacopoulos currently serves as a Partner at Octane Manage- ment Consultants. He started his professional career as an analyst in the R&D Department of a major food producer in Greece in 1992 before joining Booz Allen & Hamilton Consulting in 1995 in New York in their Operations Management Group. He sub- sequently joined Barclays Capital as the Associate Director for Strategic Planning in London from 1999 to 2002 at which time he became Director of Corporate Finance & Strategy at Aspis Group of Companies in Athens where he participated in the Group’s Management and Investment Committees. In 2005, he joined Fortis Bank NV/SA as a Director in the Energy, Commodities and Transportation Group and until 2010 acted as the Deputy Country Head for Greece, setting up the bank’s Greek branch and ex- panding its presence in ship and energy finance in the region. Mr. Christacopoulos has a diploma in chemical engineering from the National Technical University of Athens and an MBA from Columbia Business School in New York. B. Compensation Reimbursement of Expenses of Our General Partner Our general partner does not receive any management fee or other compensation for managing us. Our general partner and its other affiliates are reimbursed for expenses incurred on our behalf. These expenses include all expenses necessary or appro- priate for the conduct of our business and allocable to us, as determined by our general partner. Our general partner did not in- cur any such expenses prior to our IPO in April 2007. Executive Compensation We and our general partner were formed in January 2007. Neither we nor our general partner paid any compensation to our directors or our general partner’s officers nor accrued any obligations with respect to management incentive or retirement ben- efits for our directors or our general partner’s officers prior to April 3, 2007. Because our Chief Executive Officer and Chief Fi- nancial Officer, Mr. Lazaridis, is an employee of Capital Maritime, his compensation is set and paid by Capital Maritime, and we reimburse Capital Maritime for the cost of the provided services. We do not have a retirement plan for our executive officers or directors. Officers and employees of our general partner or its affiliates may participate in employee benefit plans and arrange- ments sponsored by Capital Maritime, our general partner or their affiliates, including plans that may be established in the fu- ture. Compensation of Directors Officers of our general partner or Capital Maritime who also serve as our directors do not receive additional compensation for their service as directors. Our directors receive compensation for attending meetings of our board of directors or committee meetings as well as for serving in the role of committee chair and have also received restricted units. Please also read “Item 6E: Share Ownership—Omnibus Incentive Compensation Plan” below for additional information. For the year ended December 31, 2012, our directors, including our chairman, received an aggregate amount of $530,000. In lieu of any other compensation, our chairman receives an annual fee for acting as a director and as the chairman of our board of directors. In addition, each director is reimbursed for out–of–pocket expenses in connection with attending meetings of the board of directors or committees and is fully indemnified by us for actions associated with being a director to the extent permitted under Marshall Islands law. Services Agreement Under a services agreement entered into between our general partner and Mr. Lazaridis, if a change in control occurs, Mr. Lazaridis may resign within six months of such change in control. 77 ANNUAL REPORT 2012 C. Board Practices Our general partner, Capital GP L.L.C., manages our day-to-day activities consistent with the policies and procedures adopt- ed by our board of directors which currently consists of eight members, three of which are appointed by our general partner. Unithold- ers are not entitled to elect the directors of our general partner or directly or indirectly participate in our management or opera- tion. There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service. Although the Nasdaq Global Market does not require a listed limited partnership like us to have a majority of independent direc- tors on our board of directors or to establish a compensation committee or a nominating/corporate governance committee our board of directors has established an audit committee and a conflicts committee comprised solely of independent directors. Each of the com- mittees operates under a written charter adopted by our board of directors which is available under “Corporate Governance” in the In- vestor Relations tab of our web site at www.capitalpplp.com. The membership and main functions of each committee are described below. Audit Committee. The audit committee of our board of directors is composed of three or more independent directors, each of whom must meet the independence standards of the Nasdaq Global Market, the SEC and any other applicable laws and regulations govern- ing independence from time to time. The audit committee is currently comprised of directors Abel Rasterhoff (chair), Pierre de De- mandolx Dedons, Keith Forman and Dimitris Christacopoulos. All members of the committee are financially literate and our board of directors has determined that Mr. Rasterhoff qualifies as an “audit committee financial expert” for purposes of the U.S. Sarbanes-Ox- ley Act of 2002. The audit committee, among other things, reviews our external financial reporting, engages our external auditors and oversees our internal audit activities and procedures and the adequacy of our internal accounting controls. Conflicts Committee. The conflicts committee of our board of directors is composed of the same directors constituting the audit committee, being Keith Forman (chair), Abel Rasterhoff, Pierre de Demandolx Dedons and Dimitris Christacopoulos. The members of our conflicts committee may not be officers or employees of our general partner or directors, officers or employees of its affiliates, and must meet the independence standards established by The Nasdaq Global Market to serve on an audit committee of a board of di- rectors and certain other requirements. The conflicts committee reviews specific matters that the board believes may involve conflicts of interest and determines if the resolution of the conflict of interest is fair and reasonable to us. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our di- rectors, our general partner or its affiliates of any duties any of them may owe us or our unitholders. D. Employees We currently do not have our own executive officers or employees and expect to rely on the officers of our general partner to man- age our day-to-day activities consistent with the policies and procedures adopted by our board of directors. All of the executive offi- cers of our general partner and three of our directors also are executive officers, directors or affiliates of Capital Maritime. E. Share Ownership As of December 31, 2012: • 795,200 restricted common units had been issued under our Plan (described below); • 623,064 common units resulting from the conversion of Crude Carriers common shares issued under the Crude Plan at the time of our merger with Crude Carriers, including shares issued under the Crude Plan to our director Dimitris Christacopoulos when he was a member of the board of directors of Crude Carriers; • Our director Keith Forman has owned a small number of common units since the date of our IPO. In addition, restricted com- mon units were also issued to all members of our board of directors in August 2010 under the terms of our Plan (described be- low) which they may be deemed to beneficially own, or to have beneficially owned. The shares issued to our newly elected di- rector Dimitris Christacopoulos when he was a member of the board of directors of Crude Carriers converted to common units in us in the same manner as all shares converted under the terms of our merger agreement. No member of our board of directors owns common or restricted units in a number representing more than 1.0% of our outstanding common units; and • The Marinakis family, including our chairman Mr. Marinakis, through its beneficial ownership of Capital Maritime and Crude Carriers Investments, may be deemed to beneficially own, or to have beneficially owned, all of the units held by Capital Mar- itime and Crude Carriers Investments. 78 ANNUAL REPORT 2012 Omnibus Incentive Compensation Plan On April 29, 2008, our board of directors adopted the Plan according to which we may issue a limited number of awards, not to exceed 500,000 units initially, to our employees, consultants, officers, directors or affiliates, including the employees, consultants, of- ficers or directors of our general partner, our manager, Capital Maritime and certain key affiliates and other eligible persons. Awards may be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, unrestricted stock, restricted stock units and performance shares. The Plan is administered by our general partner as authorized by our board of directors. On July 22, 2010, our board of directors amended the Plan to increase the aggregate number of restricted units issuable under the Plan to 800,000 from 500,000. On August 31, 2010, we, either directly or through our general partner, issued 795,200 (or 2% of our total units outstanding as of December 31, 2010) of the 800,000 units authorized under the Plan. Awards were issued to all members of our board of directors, to officers of our general partner, our manager, Capital Maritime and to employees of certain key affiliates and other eligible persons, with the majority vesting three years from the date of issuance, except for awards issued to certain members of our board of directors which vest in equal annual installments over a three-year period. On March 1, 2010, the board of directors of Crude Carriers adopted the Crude Plan according to which Crude Carriers may issue shares, not to exceed 400,000, to its employees, consultants, officers, directors or affiliates, amongst others and on August 31, 2010, 399,400 shares were issued. Except for awards issued to certain members of the Crude Carriers board at the time which vest in equal annual installments over a three-year period, the majority of the shares issued vest three years from the date of issuance. At the time of the completion of our merger with Crude Carriers all common shares of Crude Carriers which had been previously issued under the Crude Plan converted to common units in us at an exchange ratio of 1.56, with the exception of common shares is- sued to the four independent members of the Crude board of directors who did not continue as members of our board of directors which vested immediately. Concurrently, we adopted the terms of the Crude Plan which governs such converted shares, the terms and con- ditions of which are substantially similar to the terms and conditions of our Plan and remained unchanged after the completion of the merger. All awards issued under our Plan and the Crude Plan are conditional upon the grantee’s continued service until the applicable vest- ing date and all awards accrue distributions payable upon vesting. Please read Note 14 (Omnibus Incentive Compensation Plan) to our Financial Statements included herein for more information. Item 7. Major Unitholders and Related-Party Transactions. As of December 31, 2012, our partners’ capital consisted of 69,372,077 common units, of which 48,098,362 are owned by non-af- filiated public unitholders, 15,555,554 Class B Units, no subordinated units and 1,415,757 general partner units. The Marinakis fam- ily, including Evangelos M. Marinakis, our chairman, may be deemed to beneficially own a 30.3% interest in us through its beneficial ownership, amongst others, of Capital Maritime, which owned a 26.2% interest in us, which includes 17,763,305 common units, 3,433,333 Class B Units and a 1.6% interest in us through its ownership of our general partner, and of Crude Carriers Investments, which owned a 3.8% interest in us. A. Major Unitholders The following table sets forth as of January 31, 2013, the beneficial ownership of our common units by each person we know ben- eficially owns more than 5.0% or more of our common, and all of our directors, director nominees and the executive officers of our general partner as a group. The number of units beneficially owned by each person is determined under SEC rules and the informa- tion is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person beneficially owns any units as to which the person has or shares voting or investment power. 79 ANNUAL REPORT 2012 Name of Beneficial Owner Capital Maritime (1)(2) Crude Carriers Investments (2) All executive officers and directors as a group (8 persons) (2)(3) Kayne Anderson Capital Advisors, L.P. (4) Number of Common Units Owned 17,763,305 3,284,210 Percentage of Total Common Units 25.6% 4.7% 0 8,747,595 0% 12.6% (1) (2) (3) (4) Excludes the 1.6% general partner interest held by our general partner, a wholly owned subsidiary of Capital Maritime. The Marinakis family, including our chairman Mr. Marinakis, through its ownership of Capital Maritime and Crude Carriers Investments, amongst others, may be deemed to beneficially own, or to have beneficially owned, all of the units held by Capital Maritime and Crude Carriers Investments. Our director Keith Forman has owned a small number of common units since the date of our IPO. In addition, restricted common units were also issued to all members of our board of directors in August 2010 under the terms of our Plan which they may be deemed to beneficially own, or to have beneficially owned. Our director Dimitris Christacopou- los owns a number of restricted common units in us, which resulted from the conversion of restricted shares in Crude Carriers into our common units at the time of our merger with Crude Carriers. Our chairman Mr. Marinakis and our Chief Executive and Chief Financial Officer Mr. Lazaridis own certain common units in us which resulted from the conversion of shares in Crude Carriers into our common units at the time of our merger with Crude Carriers. No mem- ber of our board of directors owns common or restricted units in a number representing more than 1% of our outstanding common units. This information is based on the Schedule 13G filed by Kayne Anderson Capital Advisors, L.P. and Richard A. Kayne with the SEC on January 10, 2013. Our majority unitholders have the same voting rights as our other unitholders except that if at any time, any person or group, other than our general partner, its affiliates, including Capital Maritime, their transferees, and persons who acquired such units with the prior approval of our board of directors, owns beneficially 5% or more of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, except for purposes of nominating a person for elec- tion to our board, determining the presence of a quorum or for other similar purposes under our partnership agreement, unless otherwise required by law. The voting rights of any such unitholders in excess of 4.9% will be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote. We are not aware of any arrangements, the operation of which may at a subsequent date result in a change in control of Capital Product Partners L.P. B. Related-Party Transactions Capital Maritime’s ability, as sole member of our general partner, to control the appointment of three of the eight members of our board of directors and to approve certain significant actions we may take as well as its ownership of 25.6% of our com- mon units which it can vote in their totality on all matters that arise under the partnership agreement, means that Capital Mar- itime, together with its affiliates, will have the ability to exercise significant influence regarding our management and may be able to propose amendments to the partnership agreement that are in its best interest. Transactions entered into following January 1, 2013 1. Investor Relations Services Agreement. On January 1, 2013, we renewed our Investor Relations Agreement with Capital Ship Management to clarify the provisions under which certain investor relations and corporate support services to as- sist us in our communications with holders of units representing limited partnership interests in us shall be provided to us further to the provisions of the Administrative Services Agreement entered into with Capital Ship Management and sub- ject to its terms. Under the terms of the agreement we pay Capital Ship Management a fixed monthly fee of $15,000 plus reimbursement of reasonable expenses. The agreement will be renewed annually on its terms unless we elect not to re- new. Transactions entered into during the year ended December 31, 2012 80 ANNUAL REPORT 2012 1. Share Purchase Agreement – Exchange of M/T Alexander the Great with M/V Archimidis. On December 22, 2012, the 2010 built M/T Alexander the Great was exchanged for the M/V Archimidis, a 7,943 TEU container carrier vessel built in 2006 at Daewoo Shipbuilding in South Korea and owned by Capital Maritime. Under the terms of the share purchase agreement all assets and liabilities of the vessel owning company of the M/V Archimidis, except the vessel, necessary permits and time charter agreement, were retained by Capital Maritime. Capital Maritime paid us $1,625,000, to reflect the value and longer duration of the charter attached to the vessel. Capital Maritime received all the shares of the vessel owning com- pany of the M/T Alexander the Great and waived any compensation for the early termination of the vessel’s charter. All assets and liabilities of the vessel owning company of the M/T Alexander the Great, except the vessel and necessary per- mits were retained by us. The vessel is managed under the floating fee management agreement. The transaction was ap- proved by our board of directors following approval by the conflicts committee of independent directors of our board of directors. 2. Share Purchase Agreement – Exchange of M/T Achilleas with M/V Agamemnon. On December 22, 2012, the 2010 built M/T Achilleas was exchanged for the M/V Agamemnon, a 7,943 TEU container carrier vessel built in 2007 at Daewoo Ship- building in South Korea and owned by Capital Maritime. Under the terms of the share purchase agreement all assets and liabilities of the vessel owning company of the M/V Agamemnon, except the vessel, necessary permits and time charter agreement, were retained by Capital Maritime. We paid Capital Maritime $1,375,000, to reflect the value and longer du- ration of the charter attached to the vessel. Capital Maritime received all the shares of the vessel owning company of the M/T Achilleas and waived any compensation for the early termination of the vessel’s charter. All assets and liabilities of the vessel owning company of the M/T Achilleas, except the vessel and necessary permits were retained by us. The ves- sel is managed under the floating fee management agreement. The transaction was approved by our board of directors fol- lowing approval by the conflicts committee of independent directors of our board of directors. 3. Subscription Agreements for Class B Units. On May 11, 2012 and June 6, 2012, we entered into subscription agreements for the sale and issuance of our Class B Units with certain investors, including Capital Maritime. The transaction was ap- proved by our board of directors following approval by the conflicts committee of independent directors of our board of directors. Pursuant to the terms of the subscription agreements, Capital Maritime was issued 3,433,333 Class B Units, which are convertible at any time into our common units on a one-for-one basis. Please see “Item 4A: History and Development of the Partnership — 2012 Developments” above for a detailed description of the issuance and sale of our Class B Units. 4. Charter Party Agreements with Capital Maritime. During 2012 each of the M/T Arionas, M/T Avax, M/T Axios, M/T Ak- eraios, M/T Agisilaos, M/T Apostolos, M/T Alkiviadis, M/T Miltiadis MII, M/T Aias and M/T Amoureux entered into new or extended existing charter party agreements with Capital Maritime. With the exception of the charter for the M/T Mil- tiadis MII, each of these charters were subject to 50/50 profit sharing arrangements for breaching IWL and were unani- mously approved by the conflicts committee of independent directors of our board of directors. Please see “Item 4B: Busi- ness Overview —Our Fleet” and “—Our Charters” above for a detailed description of these charters, including earliest pos- sible redelivery dates of the vessels and relevant charter rates. 5. Amended and Restated Management Agreement . On January 1, 2012, we amended and restated the fixed fee management agreement with Capital Ship Management in its entirety to reflect, amongst others, the vessels covered by such agreement Please read “Item 4B: Business Overview—Our Management Agreements” above for a detailed description of the terms of this management agreement. 6. Investor Relations Services Agreement. On January 1, 2012, we entered into an Investor Relations Agreement with Cap- ital Ship Management to clarify the provisions under which certain investor relations and corporate support services to assist us in our communications with holders of units representing limited partnership interests in us shall be provided to us further to the provisions of the Administrative Services Agreement entered into with Capital Ship Management and sub- ject to its terms. Under the terms of the agreement we pay Capital Ship Management a fixed monthly fee of $15,000 plus reimbursement of reasonable expenses. The agreement will be renewed annually on its terms unless we elect not to renew. Transactions entered into during the year ended December 31, 2011 1. M/T Amore Mio II – Charter Party Agreement with Capital Maritime. On December 18, 2011, the M/T Amore Mio II com- menced its charter with Capital Maritime at a net daily charter rate of $18,022 per day for an 11-14 month period (+/- 30 81 ANNUAL REPORT 2012 days) with earliest redelivery expected in October 2012. The transaction was approved by our board of directors follow- ing approval by the conflicts committee of independent directors. 2. M/T Achilleas – Charter Party Agreement with Capital Maritime. On November 20, 2011, we chartered the M/T Achilleas with Capital Maritime at a gross daily charter rate of $28,000 per day plus 50/50 profit share on actual earnings settled every 6 months for the first 12 months of its time charter to Capital Maritime. Capital Maritime has the option to extend the time charter employment for a second year at $34,000 per day and for a third year at $38,000 per day with the same profit share arrangements. The M/T Achilleas was delivered to Capital Maritime in January 2012. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. 3. M/T Alexander The Great – Charter Party Agreement with Capital Maritime. On October 27, 2011, we chartered the M/T Alexander the Great with Capital Maritime at a gross daily charter rate of $28,000 per day plus 50/50 profit share on ac- tual earnings settled every 6 months for the first 12 months of its time charter to Capital Maritime. Capital Maritime has the option to extend the time charter employment for a second year at $34,000 per day and for a third year at $38,000 per day with the same profit share arrangements. The M/T Alexander The Great was delivered to Capital Maritime in November 2011. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. 4. M/T Amoureux and M/T Aias – Charter Party Agreements with Capital Maritime. On October 27, 2011, we chartered the M/T Amoureux and the M/T Aias with Capital Maritime at a gross daily charter rate of $20,000 per day plus 50/50 profit share on actual earnings settled every six months for the first 12 months of their time charter to Capital Maritime. Capi- tal Maritime has the option to extend the time charter employment for a second year at $24,000 per day and for a third year at $28,000 per day with the same profit share arrangements. Both vessels were delivered to Capital Maritime during Oc- tober and November 2011, respectively. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. 5. Amendment to Omnibus Agreement with Capital Maritime. On September 30, 2011, we amended and restated the Omnibus Agreement with Capital Maritime, Capital GP L.L.C and Capital Product Operating L.L.C in connection with the Agree- ment and Plan of Merger dated as of May 5, 2011 which governs the manner in which certain future tanker business op- portunities will be offered by Capital Maritime to us. Under the terms of the amended and restated omnibus agreement Capital Maritime and its controlled affiliates (other than us, our general partner and our subsidiaries) have agreed not to acquire, own or operate product or crude oil tankers with carrying capacity over 30,000 dwt under time or bareboat char- ters with a remaining duration, excluding any extension options, of at least twelve months at the earliest of the following dates: (a) the date the tanker to which such time or bareboat charter is attached is first acquired by Capital Maritime and its controlled affiliates and (b) the date on which a tanker owned by Capital Maritime or its controlled affiliates is put un- der such time or bareboat charter without the consent of our general partner or first offering such tanker vessel to us. Sim- ilarly, we may not acquire, own or operate product or crude oil tankers with carrying capacity under 30,000 dwt, other than vessels we had owned prior to the date of such amendment without first offering such tanker vessel to Capital Maritime. In addition, each of Capital Maritime and we have granted the other party a right of first offer on the transfer or re-char- tering of any vessels with carrying capacity over 30,000 dwt. 6. M/T Agisilaos – Extension of Charter Party Agreement with Capital Maritime. On July 25, 2011, we extended the charter of the M/T Agisilaos with Capital Maritime. The twelve month extension is fixed at a gross daily charter rate of $13,500 ($13,331 net) and the charter is subject to a profit sharing arrangement which allows each party to share, at a 50/50 per- centage, additional revenues earned for breaching the Institute Warranty Limits. The earliest expected redelivery is June 2012. 7. M/T Arionas – Extension of Charter Party Agreement with Capital Maritime. On July 25, 2011, we extended the charter of the MT Arionas with Capital Maritime. The twelve month extension is fixed at a gross daily charter rate of $13,800 ($13,628 net) and the charter is subject to a profit sharing arrangement which allows each party to share, at a 50/50 percentage, ad- ditional revenues earned for breaching the Institute Warranty Limits. The earliest expected redelivery is September 2012. 8. Share Purchase Agreement for the acquisition of the vessel owning company of the M/V Cape Agamemnon. On June 9, 2011, we entered into a share purchase agreement with Capital Maritime pursuant to which we acquired all of Capital Maritime’s 82 ANNUAL REPORT 2012 interests in the vessel owning company that owns the M/V Cape Agamemnon. The acquisition was funded through $1.5 million from available cash and the incurrence of $25.0 million of debt under our 2011 credit facility and the remainder through the issuance of 6,958,000 common units to Capital Maritime. The M/V Cape Agamemnon, a 179,221 dwt, 2010 built dry cargo vessel built at Sungdong Shipbuilding & Marine Engineering Co., Ltd., South Korea is chartered to Cosco under a charter with an earliest scheduled expiration date of June 2020, as amended. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. Please see “Item 5B: Liquidi- ty and Capital Resources— Net Cash Provided by/(Used in) Investing Activities” and Note 1 (Basis of Presentation and General Information) to our Financial Statements included herein for more information regarding this acquisition, including a detailed explanation of how it was accounted for. 9. Floating Rate Management Agreement with Capital Maritime. On June 9, 2011, we entered into a floating fee management agreement with Capital Ship Management Corp. based on actual expenses with an initial term of five years. According to this agreement Capital Ship Management provides us commercial and technical services for a daily fee that is revised an- nually based on the United States Consumer Price Index. We also reimburse our manager for all of its direct and indirect costs, expenses and liabilities incurred in providing the above services, including, but not limited to, crew, repairs and main- tenance, insurance, stores, spares, lubricants and other operating costs. Under the terms of this management agreement the costs and expenses associated with a vessel’s next scheduled drydocking are borne by us and not by our manager. 10. Agreement and Plan of Merger Agreement with Crude Carriers. On May 5, 2011, we entered into a definitive agreement to merge with Crude Carriers Corp. in a unit for share transaction whereby Crude would become a wholly owned sub- sidiary of ours. The exchange ratio was 1.56 CPLP units for each Crude Carriers share. Both we and Crude established Special Committees, consisting entirely of independent directors, to negotiate the terms of the merger agreement, and each of the Special Committees approved the transaction and recommended it to their respective boards of directors, which unanimously approved the transaction. In September 2011, we completed the merger with Crude, which was approved by 60.3%, of Crude’s unaffiliated shareholders voting as a separate class, representing approximately 97.9% of the total votes cast, at a special shareholders’ meeting. In connection with the merger, we issued an additional 24,967,240 com- mon units to holders of Crude Carriers’ shares, which includes 3,284,210 common units resulting from the conversion of Crude Carriers’ Class B Shares owned by Crude Carriers Investments and 623,064 common units resulting from the conversion of common shares issued under the Crude Plan. We also approved the election of Dimitris Christacopoulos to our board of directors as a Class II Director. The conflicts committee retained independent legal and financial advi- sors to assist in evaluating the proposed transaction and the purchase price. 11. Crude Carriers Corp. Management Agreement with Capital Ship Management. On September 30, 2011, we completed our merger with Crude Carriers, whereby it became a wholly owned subsidiary of ours. The five crude tanker vessels we acquired as part of our merger with Crude Carriers are managed under a management agreement entered into in March 2010, as amended, with Capital Ship Management whose initial term will expire on December 31, 2020 and shall be au- tomatically renewed for five-year periods if no notice of termination is given in the fourth quarter of the year immedi- ately preceding the end of the initial term or any of its extensions. Under the terms of this management agreement we reimburse our manager for all of its direct and indirect costs, expenses and liabilities incurred in providing the above serv- ices, including, but not limited to, crew, repairs and maintenance, insurance, stores, spares, lubricants and other operat- ing and administrative costs. In addition we pay our manager management fees based on the following components: a. Technical management fee at a per day daily fee to be updated on each anniversary following the Consumer Price Index; b. Sale & purchase fee equal to 1% of the gross purchase or sale price upon the consummation of any purchase or sale of a vessel by Crude Carriers; and c. Commercial services fee equal to 1.25% of all gross charter revenues generated by each vessel for commercial services rendered. In addition, the manager has the right to terminate the management agreement and, under certain circumstances, could re- ceive substantial sums in connection with such termination; however, even if our board of directors or our unitholders are dis- satisfied with the manager, there are limited circumstances under which we can terminate such management agreement. If the manager elects to terminate the management agreement, in accordance with the terms of the agreement a termination payment, which could be substantial, will be payable to the manager. This termination payment was initially set at $9.0 million and in- creases on each one-year anniversary during which the management agreement remains in effect (on a compounding basis) in 83 ANNUAL REPORT 2012 accordance with the total percentage increase, if any, in the Consumer Price Index over the immediately preceding twelve months. 12. M/T Avax – Charter Party Agreement with Capital Maritime. On May 3, 2011, we chartered the M/T Avax with Capital Maritime at a gross daily charter rate of $14,000 for 12 months (+/-30 days). The charter is subject to a profit sharing arrange- ment which allows each party to share, at a 50/50 percentage, additional revenues earned for breaching the Institute War- ranty Limits. The charter commenced in May upon redelivery of the vessel from the previous charterer, and the earliest expected redelivery under the new charter is April 2012. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. 13. M/T Akeraios – Charter Party Agreement with Capital Maritime. On May 3, 2011, we chartered the M/T Akeraios with Capital Maritime at a gross daily charter rate of $14,000 for 12 months (+/-30 days). The charter is subject to a profit sharing arrangement which allows each party to share, at a 50/50 percentage, additional revenues earned for breaching the International Warranty Limits. The charter commenced in July upon redelivery from the previous charterer, and the earliest expected redelivery under the charter is June 2012. The transaction was approved by our board of directors fol- lowing approval by the conflicts committee of independent directors. 14. M/T Amore Mio II – Charter Party Agreement with Capital Maritime. On January 7, 2011, we rechartered the M/T Amore Mio II with Capital Maritime at a net daily charter rate of $25,000 ($25,316.45 gross). The charter commenced direct- ly upon the vessel’s redelivery from its previous charter with BP Shipping Limited on January 9, 2011, and has an ear- liest scheduled expiration date of December 2011. The transaction was approved by our board of directors following ap- proval by the conflicts committee of independent directors. 15. Investor Relations Services Agreement. On January 1, 2011, we entered into a one-year Investor Relations Agreement with Capital Ship Management to clarify the provisions under which certain investor relations and corporate support servic- es to assist us in our communications with holders of units representing limited partnership interests in us shall be pro- vided to us further to the provisions of the Administrative Services Agreement entered into with Capital Ship Manage- ment and subject to its terms. Under the terms of the agreement we pay Capital Ship Management a fixed monthly fee of $15,000 plus reimbursement of reasonable expenses. Transactions entered into during the year ended December 31, 2010 1. Restricted Share Issuance under the Plan. On August 31, 2010, we, either directly or through our general partner, issued 795,200 (or 2% of our total units outstanding as of December 31, 2010) of the 800,000 units authorized under the Plan, with the majority vesting after 3 years from the date of issue, with the exception of awards issued to our Chairman and to the three independent members of our board of directors which vest in equal annual installments over a three-year period. 2. Equity Offering-Re-Acquisition of M/T Assos from Capital Maritime. On August 9, 2010, we announced the issuance of 5,500,000 common units at a public offering price of $8.63 per common unit under our 2008 Form F-3. An additional 552,254 common units were subsequently sold on the same terms following the partial exercise of the over-allotment option grant- ed to the underwriters for the offering. Capital GP L.L.C., our general partner, participated in both the offering and the ex- ercise of the over-allotment option and purchased an additional 123,515 units at the public offering price, thereby main- taining its 2% interest in us. Aggregate proceeds, net of commissions but before expenses relating to the offering, were ap- proximately $50.8 million. The net proceeds from the offering, were used to re-acquire the M/T Assos at an acquisition price of $43.5 million and for general partnership purposes. The M/T Assos was acquired with a bareboat charter attached, as, prior to its acquisition, the vessel had been leased to Arrendadora pursuant to a finance lease agreement, and was re- named M/T Insurgentes and registered under Mexican flat. The vessel was subsequently delivered by Arrendadora to Pe- mex, under a bareboat charter agreement expected to expire in March 2014, at the earliest. The proposed transaction has been approved by our board of directors following approval by the conflicts committee of independent directors. The con- flicts committee retained outside legal and financial advisors to assist in evaluating the proposed transaction and the pur- chase price. 3. Purchase of M/T Alkiviadis and Charter Agreement with Capital Maritime. On June 30, 2010, we entered into a share pur- chase agreement with Capital Maritime pursuant to which we acquired all of Capital Maritime’s interests in the wholly owned subsidiary that owns the M/T Alkiviadis. The aggregate purchase price for the vessel was $31.5 million under the terms 84 ANNUAL REPORT 2012 of the share purchase agreement with Capital Maritime, financed with cash. The M/T Alkiviadis is chartered to Capital Mar- itime for a 24-month period (+/- 30 days) at a net rate of $12,838 with an earliest scheduled expiration date of June 2012. The charter includes 50/50 profit share for voyages outside the IWL. The vessel’s operating expenses are fixed for five years until June 2015 at a daily rate of $7,000 under our Management Agreement with Capital Maritime. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. 4. M/T Arionas-Charter Party Agreement with Capital Maritime. On June 4, 2010, we rechartered the M/T Arionas with Cap- ital Maritime at a net daily charter rate of $11,850. The charter includes 50/50 profit share for voyages outside the IWL. The charter commenced in October 2010 upon the vessel’s redelivery from its previous charter in October 2010 , and has an earliest scheduled expiration date of September 2011. 5. Equity Offering–Re-Acquisition of M/T Atrotos from Capital Maritime. On February 23, 2010 we announced the issuance of 5,800,000 common units at a public offering price of $8.85 per common unit under our 2008 Form F-3. An additional 481,578 common units were subsequently sold on the same terms following the partial exercise of the over-allotment op- tion granted to the underwriters for the offering. Capital GP L.L.C., our general partner, participated in both the offering and the exercise of the over-allotment option and purchased an additional 128,195 units at the public offering price, there- by maintaining its 2 percent interest us. Aggregate proceeds, net of commissions but before expenses relating to the of- fering, were approximately $54.0 million. The net proceeds from the offering were used to reacquire the M/T Atrotos at an acquisition price of $43.0 million and for general partnership purposes. The M/T Atrotos was acquired with a bareboat charter attached, as, prior to its acquisition, on March 1, 2010, the vessel had been leased to Arrendadora pursuant to a finance lease agreement, and was renamed M/T El Pipila and registered under Mexican flat. The vessel was subsequent- ly delivered by Arrendadora to Pemex under a bareboat charter agreement expected to expire in March 2014, at the ear- liest. The proposed transaction has been approved by our board of directors following approval by the conflicts commit- tee of independent directors. The conflicts committee retained outside legal and financial advisors to assist in evaluating the proposed transaction and the purchase price. 6. M/T Agisilaos – Charter Party Agreement with Capital Maritime. On January 21, 2010, we rechartered the M/T Agisilaos with Capital Maritime at a net daily charter rate of $11,850 ($12,000 gross). The charter includes 50/50 profit share for voyages outside the IWL. The charter commenced directly upon the vessel’s redelivery from its previous charter with BP Shipping Limited, in March 2010, and has an earliest scheduled expiration date of February 2011. The transaction was ap- proved by our board of directors following approval by the conflicts committee of independent directors. 7. M/T Axios – Charter Party Agreement with Capital Maritime. On January 21, 2010, we rechartered the M/T Axios with a subsidiary of Capital Maritime at a net daily charter rate of $12,591 ($12,750 gross). The charter includes 50/50 profit share for voyages outside the IWL. The charter commenced directly upon the vessel’s redelivery from its previous charter with BP Shipping Limited in February 2010 and is expected to expire in February or March 2011. The transaction was approved by our board of directors following approval by the conflicts committee of independent directors. 8. Investor Relations Services Agreement. On January 1, 2010, we entered into a one-year Investor Relations Agreement with Capital Ship Management to clarify the provisions under which certain investor relations and corporate support services to assist us in our communications with holders of units representing limited partnership interests in us shall be provided to us further to the provisions of the Administrative Services Agreement entered into with Capital Ship Management and subject to its terms. Under the terms of the agreement we pay Capital Ship Management a fixed monthly fee of $15,000 plus reimbursement of reasonable expenses. C. Interests of Experts and Counsel Not applicable. 85 ANNUAL REPORT 2012 Item 8. Financial Information. See Item 18 for additional information required to be disclosed under this Item 8. Legal Proceedings Although we or our subsidiaries may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not at present party to any legal proceedings and are not aware of any proceedings against us, or contemplated to be brought against us. We maintain insurance policies with insurers in amounts and with coverage and de- ductibles as our board of directors believes are reasonable and prudent. We expect that these claims would be covered by insur- ance, subject to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of significant finan- cial and managerial resources and regardless of the final outcome of any such proceedings could lead to significant reputational damage which could materially affect our business and operations. Cash Distribution Policy Rationale for Our Cash Distribution Policy Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing our cash available (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributing all of our available cash. Our cash distribution policy is consis- tent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly (after de- ducting expenses, including estimated maintenance and replacement capital expenditures and reserves and subject to the prior dis- tribution rights of any holders of the Class B Units). Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy There is no guarantee that unitholders will receive quarterly distributions from us. In particular you should carefully consid- er the relevant risks included in “Item 3D: Risk Factors” included herein. Our distribution policy is subject to certain restrictions and may be changed at any time, including: • Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our part- nership agreement to distribute available cash on a quarterly basis, which is subject to the broad discretion of our board of directors to establish reserves and other limitations. • While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. The partnership agreement can be amended with the approval of a majority of the outstanding common units, of which the Marinakis family, including Evan- gelos M. Marinakis, may be deemed to beneficially own 30.7% through its beneficial ownership of Capital Maritime and Crude Carriers Investments. • Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distri- bution policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement and the establishment of any reserves for the prudent conduct of our business. • Under Section 51 of the MILPA, we may not make a distribution if the distribution would cause our liabilities (other than liabilities to partners on account of their partnership interest and liabilities for which the recourse of creditors is limited to specified property of ours) to exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in our assets only to the extent that the fair value of that property exceeds that liability. • Our common units are subject to the prior distribution rights of any holders of its preferred units then outstanding. As of the date of this Annual Report, there were 15,555,554 units of Class B Units issued and outstanding. Under the terms of our partnership agreement, we are prohibited from declaring and paying distributions on our common units until we de- clare and pay (or sets aside for payment) full distributions on the Class B Units. • We may lack sufficient cash to pay distributions on our common units due to decreases in net revenues or increases in op- erating expenses, principal and interest payments on outstanding debt, tax expenses, working capital requirements main- 86 ANNUAL REPORT 2012 tenance and replacement capital expenditures, anticipated cash needs or the payment of distributions on the Class B Units, which our partnership agreement requires us to pay prior to distributions on our common units. • • Our distribution policy will be affected by restrictions on distributions under our revolving credit facilities which contain material financial tests and covenants that must be satisfied. Should we be unable to satisfy these restrictions included in our credit facilities or if we are otherwise in default under the credit agreements, our ability to make cash distributions to our unitholders, notwithstanding our stated cash distribution policy, would be materially adversely affected. If we make distributions out of capital surplus, as opposed to operating surplus, such distributions will constitute a return of capital and will result in a reduction in the quarterly distribution and the target distribution levels. We do not anticipate that we will make any distributions from capital surplus. If the ability of our subsidiaries to make any distribution to us is restricted by, among other things, the provisions of ex- isting and future indebtedness, applicable partnership and limited liability company laws or any other laws and regulations, our ability to make distributions to our unitholders may be restricted. • Quarterly Distributions Our common unitholders are entitled under our partnership agreement to receive a quarterly distribution to the extent we have sufficient cash on hand to pay the distribution after we establish cash reserves, pay fees and expenses and make distributions to Class B unitholders, which our partnership agreement requires us to pay prior to distributions on our common units. Although we intend to continue to make strategic acquisitions and to take advantage of our unique relationship with Capital Maritime in a pru- dent manner that is accretive to our unitholders and to long-term distribution growth, there is no guarantee that we will pay a quar- terly distribution on the common units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement and other factors. We will be prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default is existing, under the terms of our credit facilities. We have generally declared distributions in January, April, July and October of each year and paid those distributions in the subsequent month. In July 2010, we revised our annual distribution guidance to $0.93 per annum, or $0.2325 per quarter and have made distributions in accordance with our guidance in each subsequent quarter. Incentive Distribution Rights Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus (as defined in our partnership agreement) after the minimum quarterly distribution and the target distri- bution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement. Except for transfers of incentive distribution rights to an affiliate or another entity as part of our general partner’s merger or consolidation with or into, or sale of substantially all of its assets to such entity, the approval of a majority of our common units (excluding common units held by our general partner and its affiliates), voting separately as a class, generally is required for a transfer of the incentive distribution rights to a third party prior to March 31, 2017. Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights. Percentage Allocations of Available Cash From Operating Surplus The following table illustrates the percentage allocations of the additional available cash from operating surplus, which is sub- ject to the distribution rights of the holders of our Class B Units under our partnership agreement, among the unitholders and our general partner up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distri- butions” are the percentage interests of the unitholders and our general partner in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount”, until avail- able cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests shown for our general partner assume that our gen- eral partner maintains its 2% general partner interest and assume our general partner has not transferred the incentive distribution rights. 87 ANNUAL REPORT 2012 Minimum Quarterly Distribution First Target Distribution Second Target Distribution Third Target Distribution Thereafter B. Significant Changes Total Quarterly Distribution Target Amount $0.3750 up to $0.4313 above $0.4313 up to $0.4688 above $0.4688 up to $0.5625 above $0.5625 Marginal Percentage Interest in Distributions Unitholders 98 % 98 % 85 % 75 % 50 % General Partner 2 % 2 % 15 % 25 % 50 % No significant changes have occurred since the date of our Financial Statements included herein except for those set out be- low: On January 22, 2013, we declared a cash distribution of $0.2325 per common unit for the fourth quarter of 2012 which will be paid on February 15, 2013 to unit holders of record on February 8, 2013. On January 22, 2013, we declared a cash distribution of $0.21375 per Class B Unit for the fourth quarter of 2013, in line with our partnership agreement. The fourth quarter Class B Unit cash distribution will be paid on February 8, 2013, to Class B unithold- ers of record on February 1, 2013. 88 ANNUAL REPORT 2012 Item 9. The Offer and Listing. C. Markets Our common units started trading on the Nasdaq Global Market under the symbol “CPLP” on March 30, 2007. The following table sets forth the high and low closing sales prices in U.S. Dollars for our common units for each of the periods indicated. Year Ended: December 31, 2012 2011 2010 2009 2008 Quarter Ended: December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 June 30, 2010 March 31, 2010 Month Ended: January 31, 2013 December 31, 2012 November 30, 2012 October 31, 2012 September 30, 2012 August 31, 2012 High 8.74 11.31 10.01 11.21 23.23 8.21 8.21 8.74 8.12 7.13 9.30 11.31 10.61 9.75 9.18 9.10 10.01 8.24 6.87 8.13 8.21 8.21 8.02 Item 10. Additional Information. A. Share Capital Not applicable. B. Memorandum and Articles of Association Low 6.21 4.89 6.88 5.23 5.70 6.21 7.55 6.46 6.42 5.71 4.89 7.88 9.34 8.19 7.99 6.88 8.36 6.81 6.33 6.21 7.71 7.55 7.55 The information required to be disclosed under this Item 10B is incorporated by reference to the following sections of the prospec- tus included in our Registration Statement on Form F-1 filed with the SEC on March 19, 2007: “The Partnership Agreement”, “De- scription of the Common Units — The Units”, “Conflicts of Interest and Fiduciary Duties” and “Our Cash Distribution Policy and Restrictions on Distributions” and our Current Reports on Form 6-K and relevant Exhibits furnished to the SEC on May 23, 2012 and June 6, 2012. C. Material Contracts The following is a summary of each material contract, other than contracts entered into in the ordinary course of business, to which we or any of our subsidiaries are a party, for the two years immediately preceding the date of this Annual Report, each of which is included in the list of exhibits in Item 19. 89 ANNUAL REPORT 2012 Please read “Item 7B: Related-Party Transactions” above for transactions entered into with related parties as well as further details on certain of the transactions described below. • Amendment to the 2008 credit facility replacing the M/T Alexander the Great and the M/T Achilleas as collateral under • • • the facility with the M/V Agamemnon and the M/V Archimidis. Share Purchase Agreement dated December 22, 2012, with Capital Maritime to acquire all of its interest in the vessel own- ing company of the M/V Archimidis in exchange for the interest in the vessel owning company of the M/T Alexander the Great. Capital Maritime also paid us $1,625,000, to reflect the value and longer duration of the charter attached to the ves- sel and waived any compensation for the early termination of the vessel’s charter. Share Purchase Agreement dated December 22, 2012, with Capital Maritime to acquire all of its interest in the vessel own- ing company of the M/V Agamemnon in exchange for the interest in the vessel owning company of the M/T Achilleas. We paid Capital Maritime $1,375,000, to reflect the value and longer duration of the charter attached to the vessel and Capi- tal Maritime waived any compensation for the early termination of the vessel’s charter. Subscription Agreement dated June 6, 2012, between us and the purchasers named therein in connection with the issuance and sale of the Class B Units. • Registration Rights Agreement dated June 6, 2012, between us and Salient Midstream & MLP Fund in connection with the issuance and sale of the Class B Units. • Registration Rights Agreement dated May 22, 2012, among us and the purchasers named therein in connection with the is- suance and sale of the Class B Units. • Amendment to Partnership Agreement dated May 22, 2012, in connection with the issuance and sale of our Class B Units, which establishes and sets forth the rights, preferences, privileges, duties and obligations of the Class B Units. • Amendment to the 2011 credit facility dated May 21, 2012 in connection with the issuance and sale of our Class B Units, providing for a deferral of scheduled amortization payments until March 31, 2016. • Amendment to 2008 credit facility dated May 21, 2012 in connection with the issuance and sale of our Class B Units, pro- viding for a deferral of scheduled amortization payments until March 31, 2016, amending the interest margin and cancelling an undrawn tranche under the facility. • Amendment to 2007 credit facility dated May 21, 2012 in connection with the issuance and sale of our Class B Units, pro- viding for a deferral of scheduled amortization payment until March 31, 2016, the conversion of the facility into a term loan and amending the interest margin. Subscription Agreement dated May 11, 2012, between us and the purchasers named therein in connection with the issuance and sale of the Class B Units. • • Amendment to Partnership Agreement dated September 30, 2011, in connection with the Agreement and Plan of Merger dated as of May 5, 2011. The Amendment increases the size of our board of directors by one, from seven to eight, and in- cludes certain other changes being made pursuant to the Merger Agreement. • • Amendment and Restatement of Omnibus Agreement. On September 30, 2011, we amended and restated the Omnibus Agree- ment between us and Capital Maritime, in connection with the Agreement and Plan of Merger dated as of May 5, 2011. The amendment limits our ability to acquire, own or operate certain product or crude oil tankers based on carrying capacity and the remaining duration of their charters, and includes certain other changes being made pursuant to the Merger Agreement. • Loan Agreement with Credit Agriole Emporiki Bank. On June 9, 2011, we entered into a new $25.0 million credit facili- ty provided by Credit Agricole Emporiki Bank in connection with the acquisition of the vessel owning company of the M/V Cape Agamemnon from Capital Maritime. The full amount available under the facility was drawn down to finance part of the acquisition cost of the vessel. The new facility is non-amortizing until March 2013 and is priced at LIBOR plus 3.25%. Share Purchase Agreement dated June 9, 2011, with Capital Maritime to acquire all of its interest in the vessel owning com- pany of the M/V Cape Agamemnon. The acquisition was funded partly through the issuance of 6,958,000 common units to Capital Maritime and the remainder through the incurrence of $25.0 million of debt under our 2011 credit facility. We also paid $1.5 million to Capital Maritime as part of the consideration for the acquisition which was contributed by our gen- eral partner to us in exchange for 142,000 general partner units in order for it to maintain its 2% interest in us. The M/V Cape Agamemnon is chartered to Cosco under a charter, as amended, with an earliest scheduled expiration date of June 2020. • Agreement and Plan of Merger dated May 5, 2011, with Crude Carriers Corp, amongst others, to merge with Crude Carri- ers in a unit for share transaction whereby Crude Carriers would become a wholly owned subsidiary of ours. The exchange ratio was 1.56 CPLP units for each Crude Carriers share, which equated to a value of $17.58 per Crude share based on CPLP’s closing unit price of $11.27 on May 4, 2011. The transaction was approved by a special meeting of shareholders of Crude Carriers and consummated in September 2011. Share Purchase Agreement dated August 13, 2010, with Capital Maritime to acquire all of its interest in the wholly owned subsidiary that owns the M/T Assos, one of the vessels identified under our Omnibus Agreement with Capital Maritime, • 90 ANNUAL REPORT 2012 using the net proceeds of an equity offering completed on August 9, 2010. The acquisition price of the vessel was $43.5 million. Prior to its acquisition, the vessel had been leased to Arrendadora pursuant to a finance lease agreement, and was renamed M/T Insurgentes and registered under Mexican flat. The vessel was subsequently delivered by Arrendadora to Pe- mex under a bareboat charter agreement expected to expire in March 2014, at the earliest. • Amendment to Omnibus Incentive Compensation Plan. On July 22, 2010, our board of directors amended the Plan to in- • • crease the aggregate number of restricted units issuable under the Plan to 800,000 from 500,000. Share Purchase Agreement dated June 30, 2010, with Capital Maritime to acquire all of its interest in the wholly owned subsidiary that owns the M/T Alkiviadis, one of the vessels identified under our Omnibus Agreement with Capital Maritime. The aggregate purchase price for the vessel was $31.5 million, financed with cash. Share Purchase Agreement dated February 22, 2010, with Capital Maritime to acquire all of its interest in the wholly owned subsidiary that owns the M/T Atrotos, one of the vessels identified under our Omnibus Agreement with Capital Maritime, using the net proceeds of an equity offering completed on February 23, 2010. The acquisition price of the vessel was $43.0 million. Prior to its acquisition, the vessel had been leased to Arrendadora pursuant to a finance lease agreement, and was renamed M/T El Pipila and registered under Mexican flat. The vessel was subsequently delivered by Arrendadora to Pe- mex under a bareboat charter agreement expected to expire in March 2014, at the earliest. D. Exchange Controls and Other Limitations Affecting Unitholders We are not aware of any governmental laws, decrees or regulations, including foreign exchange controls, in the Republic of The Marshall Islands that restrict the export or import of capital, or that affect the remittance of dividends, interest or other pay- ments to non-resident holders of our securities. We are not aware of any limitations on the right of non-resident or foreign own- ers to hold or vote our securities imposed by the laws of the Republic of The Marshall Islands or our partnership agreement. E. Taxation Marshall Islands Taxation The following is a discussion of the material Marshall Islands tax consequences of our activities to unitholders who do not re- side in, maintain offices in or engage in business in the Marshall Islands (“non-resident holders”). Because we, our operating sub- sidiary and our controlled affiliates do not, and we do not expect that we, our operating subsidiary and our controlled affiliates will, conduct business or operations in the Marshall Islands, under current Marshall Islands law non-resident holders of our se- curities will not be subject to Marshall Islands taxation or withholding on distributions, including upon a return of capital, we make to such non-resident holders. In addition, non-resident holders will not be subject to Marshall Islands stamp, capital gains or oth- er taxes on the purchase, ownership or disposition of our securities, and will not be required by the Republic of The Marshall Is- lands to file a tax return relating to such securities. Taxation of the Partnership Because we, our operating subsidiary and our controlled affiliates do not, and we do not expect that we, our operating sub- sidiary and our controlled affiliates will conduct business or operations in the Marshall Islands, under current Marshall Islands law neither we nor our controlled affiliates will be subject to income, capital gains, profits or other taxation. As a result, distri- butions by our operating subsidiary and our controlled affiliates to us will not be subject to Marshall Islands taxation. Material United States Federal Income Tax Considerations The following is a discussion of the material U.S. federal income tax considerations that may be relevant to current and prospec- tive common unitholders. This discussion is based upon provisions of the Code, Treasury Regulations, and current administrative rulings and court decisions, all as currently in effect or existence on the date of this Annual Report and all of which are subject to change, possibly with retroactive effect. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. The following discussion applies only to beneficial owners of our common units that own such units as “capital assets” (gen- erally, for investment purposes) and does not comment on all aspects of U.S. federal income taxation which may be important to particular common unitholders in light of their individual circumstances, such as unitholders subject to special tax rules (e.g., fi- nancial institutions, insurance companies, broker-dealers, tax-exempt organizations, or former citizens or long-term residents of 91 ANNUAL REPORT 2012 the United States), persons that will hold the common units as part of a straddle, hedge, conversion, constructive sale, wash sale or other integrated transaction for U.S. federal income tax purposes, persons that own (actually or constructively) 10.0% or more of the total combined voting power of all classes of our units entitled to vote, or U.S. Holders (as defined below) that have a func- tional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. If a partnership or other entity classified as a partnership for U.S. federal income tax purposes holds our common units, the tax treatment of a partner thereof will generally depend upon the status of the partner and upon the tax treatment of the part- nership. If you are a partner in a partnership holding our common units, you should consult your tax advisor. No ruling has been or will be requested from the IRS regarding any matter affecting us or our common unitholders. The state- ments made here may not be sustained by a court if contested by the IRS. This discussion does not contain information regarding any U.S. state or local, estate or alternative minimum tax considera- tions concerning the ownership or disposition of our common units. Each common unitholder is urged to consult its tax advisor regarding the U.S. federal, state, local and other tax consequences of the ownership or disposition of our common units. Election to be Taxed as a Corporation We have elected to be taxed as a corporation for U.S. federal income tax purposes. As such, among other consequences, U.S. Holders (as defined below) will, subject to the discussion of certain rules relating to PFICs below (please see “PFIC Status and Significant Tax Consequences”), generally not directly be subject to U.S. federal income tax on our income, but rather will be sub- ject to U.S. federal income tax on distributions received from us and dispositions of common units, as described below. As a cor- poration, we may be subject to U.S. federal income tax on our income as discussed below. Additionally, distributions from us to common unitholders will generally be reported on Internal Revenue Service Form 1099-DIV. Taxation of Operating Income We expect that substantially all of our gross income will continue to be attributable to the transportation of crude oil and re- lated oil products as well as dry cargo and containerized goods. For this purpose, gross income attributable to transportation (or “Transportation Income”) includes income derived from, or in connection with, the use (or hiring or leasing for use) of a vessel to transport cargo, or the performance of services directly related to the use of any vessel to transport cargo, and thus includes spot charter, time charter and bareboat charter income. Transportation Income that is attributable to transportation that begins or ends, but that does not both begin and end, in the Unit- ed States (or “U.S. Source International Transportation Income”) will be considered to be 50% derived from sources within the United States. Transportation Income attributable to transportation that both begins and ends in the United States (or “U.S. Source Domestic Transportation Income”) will be considered to be 100% derived from sources within the United States. Transportation Income attributable to transportation exclusively between non-U.S. destinations will be considered to be 100% derived from sources outside the United States. Transportation Income derived from sources outside the United States generally will not be subject to U.S. federal income tax. Based on our current operations, we do not expect to have U.S. Source Domestic Transportation Income. However, certain of our activities give rise to U.S. Source International Transportation Income, and future expansion of our operations could result in an increase in the amount of U.S. Source International Transportation Income, as well as give rise to U.S. Source Domestic Trans- portation Income, all of which could be subject to U.S. federal income taxation unless exempt from U.S. taxation under Section 883 of the Code (or the “Section 883 Exemption”), as discussed below. The Section 883 Exemption In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder (the “Section 883 Regulations”), it will not be subject to the net basis and branch profits taxes or the 4% gross basis tax described below on its U.S. Source International Transportation Income. The Section 883 Exemption applies to U.S. Source International Transportation Income and other forms of related income, such as gain from the sale of a vessel. As discussed below, we believe that under our current ownership structure, the Section 883 Exemption will ap- ply and we will not be taxed on our U.S. Source International Transportation Income. The Section 883 Exemption does not apply to U.S. Source Domestic Transportation Income. 92 ANNUAL REPORT 2012 We will qualify for the Section 883 Exemption if, among other matters, we meet the following three requirements: • We are organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States (an “Equivalent Exemption”); • We satisfy the “Publicly Traded Test” (as described below); and • We meet certain substantiation, reporting and other requirements. The Publicly Traded Test requires that the stock of a non-U.S. corporation be “primarily and regularly traded” on an established securities market either in the United States or in a jurisdiction outside the United States that grants an Equivalent Exemption. The Section 883 Regulations provide, in pertinent part, that equity interests in a non-U.S. corporation will be considered to be “pri- marily traded” on an established securities market in a given country if the number of units of each class of equity relied upon to meet the “regularly traded” test that are traded during any taxable year on all established securities markets in that country ex- ceeds the number of units in each such class that are traded during that year on established securities markets in any other single country. Equity of a non-U.S. corporation will be considered to be “regularly traded” on an established securities market under the Section 883 Regulations if one or more classes of equity of the corporation that, in the aggregate, represent more than 50% of the total combined voting power and value of the non-U.S. corporation are listed on such market and certain trading volume re- quirements are met or deemed met as described below. For this purpose, if one or more “5% unitholders” (i.e., a unitholder hold- ing, actually or constructively, at least 5% of the vote and value of a class of equity) own in the aggregate 50% or more of the vote and value of a class of equity (the “Closely Held Block”), such class of equity will not be counted towards meeting the “primar- ily and regularly traded” test (the “Closely Held Block Exception”). We are organized under the laws of the Republic of The Marshall Islands. The U.S. Treasury Department has recognized the Republic of The Marshall Islands as a jurisdiction that grants an Equivalent Exemption. Consequently, our U.S. Source Interna- tional Transportation Income (including, for this purpose, (i) any such income earned by our subsidiaries that have properly elect- ed to be treated as partnerships or disregarded as entities separate from us for U.S. federal income tax purposes and (ii) any such income earned by subsidiaries that are corporations for U.S. federal income tax purposes, are organized in a jurisdiction that grants an Equivalent Exemption and whose outstanding stock is owned 50% or more by value by us) will be exempt from U.S. federal income taxation provided we meet the Publicly Traded Test. In addition, since our common units are only traded on the Nasdaq Global Market, which is considered to be an established securities market, our common units will be deemed to be “primarily trad- ed” on an established securities market. We believe we meet the trading volume requirements of the Section 883 Exemption because the pertinent regulations provide that trading volume requirements will be deemed to be met with respect to a class of equity traded on an established securities mar- ket in the United States where, as will be the case for our common units, the units are regularly quoted by dealers who regularly and actively make offers, purchases and sales of such units to unrelated persons in the ordinary course of business. Additionally, the pertinent regulations also provide that a class of equity will be considered to be “regularly traded” on an established securi- ties market if (i) such class of stock is listed on such market, (ii) such class of stock is traded on such market, other than in min- imal quantities, on at least 60 days during the taxable year or one sixth of the days in a short taxable year, and (iii) the aggregate number of shares of such class of stock traded on such market during the taxable year is at least 10% of the average number of shares of such class of stock outstanding during such year, or as appropriately adjusted in the case of a short taxable year. We be- lieve that trading of our common units has satisfied these conditions in the past, and we expect that such conditions will contin- ue to be satisfied. Finally, we believe that our common units represent more than 50% of our voting power and value and accordingly we believe that our units should be considered to be “regularly traded” on an established securities market. These conclusions, however, are based upon legal authorities that do not expressly contemplate an organizational structure such as ours. In particular, although we have elected to be treated as a corporation for U.S. federal income tax purposes, for corporate law purposes we are organized as a limited partnership under Marshall Islands law and our general partner is responsible for man- aging our business and affairs and has been granted certain veto rights over decisions of our board of directors. Accordingly, it is possible that the IRS could assert that our units do not meet the “regularly traded” test. We expect that our units will not lose eligibility for the Section 883 Exemption as a result of the Closely Held Block Excep- tion, because our partnership agreement provides that the voting rights of any 5% unitholders (other than our general partner and its affiliates, their transferees and persons who acquired such units with the approval of our board of directors) are limited to a 4.9% voting interest in us regardless of how many common units are held by that 5% unitholder. (The voting rights of any such unitholders in excess of 4.9% will be redistributed pro rata among the other common unitholders holding less than 4.9% of the 93 ANNUAL REPORT 2012 voting power of all classes of units entitled to vote). If Capital Maritime and our general partner own 50% or more of our com- mon units, they will provide the necessary documents to establish an exception to the application of the Closely Held Block Ex- ception. This exception is available when shareholders residing in a jurisdiction granting an Equivalent Exemption and meeting certain other requirements own sufficient shares in the Closely Held Block to preclude shareholders who have not met such re- quirements from owning 50% or more of the outstanding class of equity relied upon to satisfy the Publicly Traded Test. Thus, although the matter is not free from doubt, we believe that we will satisfy the Publicly Traded Test. Should any of the facts described above cease to be correct, our ability to satisfy the test will be compromised. Taxation of Operating Income in the Absence of the Section 883 Exemption If we earn U.S. Source International Transportation Income and the Section 883 Exemption does not apply, the U.S. source portion of such income may be treated as effectively connected with the conduct of a trade or business in the United States (or “Effectively Connected Income”) if we have a fixed place of business in the United States and substantially all of our U.S. Source International Transportation Income is attributable to regularly scheduled transportation or, in the case of bareboat charter income, is attributable to a fixed place of business in the United States. Based on our current operations, none of our potential U.S. Source International Transportation Income is attributable to regularly scheduled transportation or is received pursuant to bareboat char- ters attributable to a fixed place of business in the United States. As a result, we do not anticipate that any of our U.S. Source In- ternational Transportation Income will be treated as Effectively Connected Income. However, there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States in the future, which would result in such income being treated as Effectively Connected Income. In addition, any U.S. Source Domestic Transportation Income generally will be treated as Effectively Connected Income. Any income we earn that is treated as Effectively Connected Income would be subject to U.S. federal corporate income tax (the highest statutory rate is currently 35%). In addition, a 30% branch profits tax imposed under Section 884 of the Code also would apply to such income, and a branch interest tax could be imposed on certain interest paid or deemed paid by us. Taxation of Gain on the Sale of a Vessel Provided we qualify for the Section 883 Exemption, gain from the sale of a vessel should be exempt from tax under Section 883. If, however, we do not qualify for the Section 883 Exemption, then such gain could be treated as effectively connected income (determined under rules different from those discussed above) and subject to the net income and branch profits tax regime described above. The 4% Gross Basis Tax If the Section 883 Exemption does not apply and the net basis tax does not apply, we would be subject to a 4% U.S. federal income tax on the U.S. source portion of our U.S. Source International Transportation Income, without the benefit of deductions. U.S. Federal Income Taxation of U.S. Holders As used herein, the term U.S. Holder means a beneficial owner of our common units that is an individual U.S. citizen or res- ident (as determined for U.S. federal income tax purposes), a corporation or other entity organized under the laws of the United States or its political subdivisions and classified as a corporation for U.S. federal income tax purposes, an estate the income of which is subject to U.S. federal income taxation regardless of its source, or a trust if a court within the United States is able to ex- ercise primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all sub- stantial decisions of the trust. Distributions Subject to the discussion of the rules applicable to PFICs below, any distributions made by us with respect to our common units to a U.S. Holder generally will constitute dividends, which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current and accumulated earnings and profits, as determined under U.S. fed- eral income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capi- tal to the extent of the U.S. Holder’s tax basis in its common units on a dollar-for-dollar basis and thereafter as capital gain. U.S. 94 ANNUAL REPORT 2012 Holders that are corporations generally will not be entitled to claim a dividends received deduction with respect to any distribu- tions they receive from us. Dividends paid with respect to our common units generally will be treated as “passive” income from sources outside the United States for purposes of computing allowable foreign tax credits for U.S. federal income tax purposes. Dividends paid on our common units to a U.S. Holder who is an individual, trust or estate (or a U.S. Individual Holder) will be treated as qualified dividend income that is taxable to such U.S. Individual Holder at preferential rates applicable to long-term capital gain provided that: (i) our common units are readily tradable on an established securities market in the United States (such as the Nasdaq Global Market on which our common units are traded); (ii) we are not a PFIC (which we do not believe we are, have been or will be, as discussed below); (iii) the U.S. Individual Holder has owned the common units for more than 60 days in the 121-day period beginning 60 days before the date on which the common units become ex-dividend (and has not entered into certain risk limiting transactions with respect to such units); and (iv) the U.S. Individual Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. There is no assurance that any dividends paid on our common units will be eligible for these preferential rates in the hands of a U.S. Individual Holder, and any dividends paid on our common units that are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Individual Holder. Special rules may apply to any “extraordinary dividend” paid by us. An extraordinary dividend is, generally, a dividend with respect to a unit if the amount of the dividend is equal to or in excess of 10 percent of a unitholder’s adjusted basis (or fair market value in certain circumstances) in such unit. If we pay an “extraordinary dividend” on our common units that is treated as “qualified dividend income”, then any loss derived by a U.S. Individual Holder from the sale or exchange of such units will be treated as long-term capital loss to the extent of the amount of such dividend. Sale, Exchange or other Disposition of Common Units Subject to the discussion of PFICs below, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common units in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s tax basis in such units. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or oth- er disposition. Such capital gain or loss will generally be treated as U.S. source income or loss, as applicable, for U.S. foreign tax credit purposes. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations. Long-term capital gain of a U.S. Individual Holder is generally subject to tax at preferential rates. PFIC Status and Significant Tax Consequences • • Special and adverse U.S. federal income tax rules apply to a U.S. Holder that owns an equity interest in a non-U.S. entity taxed as a corporation and classified as a PFIC for U.S. federal income tax purposes. In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which such holder held our common units, either: at least 75% of our gross income (including the gross income of our vessel owning subsidiaries) for such taxable year consists of passive income (e.g., dividends, interest, capital gains and rents derived other than in the active conduct of a rental busi- ness), or at least 50% of the average value of the assets held by us (including the assets of our vessel owning subsidiaries) during such taxable year produce, or are held for the production of, passive income. Income earned, or deemed earned, by us in connection with the performance of services would not constitute passive income. By contrast, rental income would generally constitute “passive income” unless we were treated under specific rules as deriving our rental income in the active conduct of a trade or business. Based on our current and projected methods of operation, we be- lieve that we are not currently a PFIC, nor do we expect to become a PFIC. Although there is no legal authority directly on point, and we are not obtaining a ruling from the IRS on this issue, we will take the position that, for purposes of determining whether we are a PFIC, the gross income we derive or are deemed to derive from the time and spot chartering activities of our wholly owned subsidiaries constitutes services income, rather than rental income. Correspondingly, such income should not constitute passive income, and the assets that we or our wholly owned subsidiaries own and operate in connection with the production of such in- come, in particular, the vessels we or our subsidiaries own that are subject to time charters, should not constitute passive assets for purposes of determining whether we were a PFIC. As noted above, there is, however, no direct legal authority under the PFIC rules addressing our method of operation. More- over, in a case not specifically interpreting the PFIC rules, Tidewater Inc. v. United States , 565 F.3d 299 (5th Cir. 2009), the Fifth Circuit held that the vessel time charters at issue generated predominantly rental income rather than services income. However, 95 ANNUAL REPORT 2012 the court’s ruling was contrary to the position of the IRS that the time charter income should have been treated as services income. Additionally, the IRS later affirmed its position in Tidewater , adding further that the time charters at issue would be treated as giving rise to services income under the PFIC rules. No assurance, however, can be given that the IRS, or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine we are or were a PFIC. In addition, although we intend to conduct our affairs in a manner to avoid, to the extent possible, being classified as a PFIC with respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future, or that we can avoid PFIC status in the future. As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to dif- ferent taxation rules depending on whether the U.S. Holder makes an election to treat us as a “Qualified Electing Fund”, which election we refer to as a “QEF election”. As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark- to-market” election with respect to our common units, as discussed below. Taxation of U.S. Holders Making a Timely QEF Election If a U.S. Holder makes a timely QEF election, which U.S. Holder we refer to as an “Electing Holder”, the Electing Holder must report each year for U.S. federal income tax purposes his pro rata share of our ordinary earnings and our net capital gain, if any, for our taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing Holder. The Electing Holder’s adjusted tax basis in the common units will be increased to re- flect taxed but undistributed income. Distributions of earnings and profits that had been previously taxed will result in a corre- sponding reduction in the adjusted tax basis in the common units and will not be taxed again once distributed. An Electing Hold- er would generally recognize capital gain or loss on the sale, exchange or other disposition of our common units. A U.S. Holder would make a QEF election with respect to any year that we are a PFIC by filing one copy of IRS Form 8621 with his U.S. fed- eral income tax return and a second copy in accordance with the instructions to such form. If contrary to our expectations, we de- termine that we are treated as a PFIC for any taxable year, we will attempt to provide each U.S. Holder with all necessary infor- mation in order to make the QEF election described above. Taxation of U.S. Holders Making a “Mark-to-Market” Election Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate, our common units were treated as “marketable stock”, a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our common units, pro- vided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Reg- ulations. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the common units at the end of the taxable year over such holder’s adjusted tax basis in the com- mon units. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjust- ed tax basis in the common units over the fair market value thereof at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in his common units would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of our com- mon units would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the common units would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously in- cluded by the U.S. Holder. Taxation of U.S. Holders not making a timely QEF or mark-to-market election Finally, if we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a “mark-to-market” election for that year, whom we refer to as a “Non-Electing Holder”, would be subject to special rules with re- spect to (1) any excess distribution (i.e., the portion of any distributions received by the Non-Electing Holder on our common units in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing Holder in the three preced- ing taxable years, or, if shorter, the Non-Electing Holder’s holding period for the common units), and (2) any gain realized on the sale, exchange or other disposition of our common units. Under these special rules: • • the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for the common units; the amount allocated to the current taxable year and any year prior to the year we were first treated as a PFIC with respect 96 ANNUAL REPORT 2012 • to the Non-Electing Holder would be taxed as ordinary income; and the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with re- spect to the resulting tax attributable to each such other taxable year. These penalties would not apply to a qualified pension, profit sharing or other retirement trust or other tax-exempt organiza- tion that did not borrow money or otherwise utilize leverage in connection with its acquisition of our common units. If we were treated as a PFIC for any taxable year and a Non-Electing Holder who is an individual dies while owning our common units, such holder’s successor generally would not receive a step-up in tax basis with respect to such units. U.S. Federal Income Taxation of Non-U.S. Holders A beneficial owner of our common units (other than a partnership, including any entity or arrangement treated as a partner- ship for U.S. federal income tax purposes) that is not a U.S. Holder is a Non-U.S. Holder. Distributions Distributions we pay to a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax if the Non-U.S. Holder is not engaged in a U.S. trade or business. If the Non-U.S. Holder is engaged in a U.S. trade or business, distributions we pay may be subject to U.S. federal income tax to the extent those distributions constitute income effectively connected with that Non-U.S. Holder’s U.S. trade or business. However, distributions paid to a Non-U.S. Holder who is engaged in a trade or busi- ness may be exempt from taxation under an income tax treaty if the income represented thereby is not attributable to a U.S. per- manent establishment maintained by the Non-U.S. Holder. Disposition of Common Units The U.S. federal income taxation of Non-U.S. Holders on any gain resulting from the disposition of our common units is gen- erally the same as described above regarding distributions. However, individual Non-U.S. Holders may be subject to tax on gain resulting from the disposition of our common units if they are present in the United States for 183 days or more during the tax- able year in which those shares are disposed and meet certain other requirements. Backup Withholding and Information Reporting In general, payments of distributions on our common units or the proceeds of a disposition of our common units to a U.S. In- dividual Holder will be subject to information reporting requirements. These payments also may be subject to backup withhold- ing, if the U.S. Individual Holder: • • • fails to provide an accurate taxpayer identification number; is notified by the IRS that he has failed to report all interest or corporate distributions required to be shown on its U.S. fed- eral income tax returns; or in certain circumstances, fails to comply with applicable certification requirements. Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding on pay- ments within the United States by certifying their status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable. Backup with- holding is not an additional tax. Rather, a common unitholder generally may obtain a credit for any amount withheld against his liability for U.S. federal income tax (and a refund of any amounts withheld in excess of such liability) by filing a return with the IRS. F. Dividends and Paying Agents Not applicable. G. Statements by Experts Not applicable. 97 ANNUAL REPORT 2012 H. Documents on Display We have filed with the SEC a registration statement on Form F-1, a registration statement on Form F-4 and two registration statements on Form F-3 regarding our common units. This Annual Report does not contain all of the information found in these registration statements. For further information regarding us and our common units, you may wish to review the full registration statements, including their exhibits. The registration statements, including the exhibits, may be inspected and copied at the pub- lic reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of this material can also be obtained upon written request from the Public Reference Section of the SEC at 100 F Street, N.E, Washington, D.C. 20549, at pre- scribed rates or from the SEC’s web site on the Internet at http://www.sec.gov free of charge. Please call the SEC at 1-800-SEC- 0330 for further information on public reference room. Our registration statement can also be inspected and copied at the offices of the Nasdaq Global Market, One Liberty Plaza, New York, New York 10006. I. Subsidiary Information Please see Exhibit 8.1 to this Annual Report for a list of our significant subsidiaries as of December 31, 2012. Item 11. Quantitative and Qualitative Disclosures About Market Risk. Our Risk Management Policy Our policy is to continuously monitor our exposure to business risks, including the impact of changes in interest rates and cur- rency rates as well as inflation on earnings and cash flows. We intend to assess these risks and, when appropriate, take measures to minimize our exposure to the risks. Foreign Exchange Risk We do not have a material currency exposure risk. We generate all of our revenues in U.S. Dollars and incur less than 5% of our expenses in currencies other than U.S. Dollars. For accounting purposes, expenses incurred in currencies other than the U.S. Dol- lar are translated into U.S. Dollars at the exchange rate prevailing on the date of each transaction. As of December 31, 2012, less than 5% of liabilities were denominated in currencies other than U.S. Dollars (mainly in Euros). These liabilities were translated into U.S. Dollars at the exchange rate prevailing on December 31, 2012. We have not hedged currency exchange risks and our op- erating results could be adversely affected as a result. Interest Rate Risk The international tanker industry is capital intensive, requiring significant amounts of investment, a significant portion of which is provided in the form of long-term debt. Our current debt contains interest rates that fluctuate with LIBOR. Our credit facilities of $370.0 million and $350.0 million each bear an interest margin of 2% and 3% per annum over US$ LIBOR. Our credit facili- ty of $25.0 million bears an interest margin of 3.25% per annum over US$ LIBOR Therefore, we are exposed to the risk that our interest expense may increase if interest rates rise. Currently we have three interest rate swap agreements of $59.1 million that will expire in March 2013. During 2012 nine in- terest rate swap agreements expired and two were closed out. The swapped portion under our credit facilities would not be affected by changes in LIBOR during the swapped period. However, as a result of a market disruption in determining the cost of funds for our banks, any increases by the banks to their “funding costs” under our agreements will lead to proportional increases in the rel- evant interest amounts interest payable under our agreement on a quarterly basis. An increase of 1% in our interest rate will cause interest expense to increase by $4.6 million. Please refer to “Item 5B: Liquidity and Capital Resources—Revolving Credit Facil- ities” for more information on the specific rates we have entered into under each swap agreement. Please read Note 2 (Significant Accounting Policies), Note 7 (Long-Term Debt) and Note 8 (Financial Instruments) to our Fi- nancial Statements included herein, which provide additional information with respect to our derivative financial instruments and existing debt agreements. Concentration of Credit Risk 98 ANNUAL REPORT 2012 Financial instruments which potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, interest rate swap agreements, and trade accounts receivable. We place our cash and cash equivalents, consist- ing mostly of deposits, and enter into interest rate swap agreements with creditworthy financial institutions as rated by qualified rating agencies. For the years ended December 31, 2012, 2011, and 2010, 68%, 56%, and 60% of our revenues, respectively, were derived from two charterers. We do not obtain rights to collateral to reduce our credit risk. Please refer to “Item 5B: Liquidity and Capital Resources—Revolving Credit Facilities” for more information on our interest rate swap agreements. Inflation Inflation has had a minimal impact on vessel operating expenses, drydocking expenses and general and administrative expenses to date. Our management does not consider inflation to be a significant risk to direct expenses in the current and foreseeable eco- nomic environment. However, in the event that inflation becomes a significant factor in the global economy, inflationary pressures would result in increased operating, voyage and financing costs. Item 12. Description of Securities Other than Equity Securities. Not Applicable. 99 ANNUAL REPORT 2012 PART II _______________________ Item 13. Defaults, Dividend, Arrearages and Delinquencies. None. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. No material modifications to the rights of security holders. Item 15. Controls and Procedures. a. Disclosure Controls and Procedures As of December 31, 2012, our management (with the participation of the chief executive officer and chief financial officer of our general partner) conducted an evaluation pursuant to Rule 13a-15(b) and 15d-15 promulgated under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of the design and operation of our disclosure controls and pro- cedures. Our management, including the chief executive and chief financial officer of our general partner, recognize that any con- trols and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the ob- jectives of the disclosure controls and procedures are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the partnership have been detected. Further, in the design and evaluation of our disclosure controls and procedures our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limi- tations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, based on this evaluation, the chief executive officer and chief financial officer of our general partner concluded that as of December 31, 2012, our disclosure controls and procedures, which include, without limitation, controls and procedures de- signed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accu- mulated and communicated to the management, including the chief executive officer and chief financial officer of our general part- ner, as appropriate to allow timely decisions regarding required disclosure, were effective to provide reasonable assurance that in- formation required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. b. Management’s Annual Report on Internal Control over Financial Reporting Our management (with the management of our general partner) is responsible for establishing and maintaining adequate inter- nal controls over financial reporting. Our internal controls were designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of our Financial Statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal controls over financial reporting includes those policies and procedures that 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; 2) provide reasonable assur- ance that transactions are recorded as necessary to permit preparation of our Financial Statements in accordance with generally ac- cepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of manage- ment and the directors of our general partnership; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the our assets that could have a material effect on the financial statements. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Com- mission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, test- ing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management believes that our internal control over financial reporting was effective as of December 31, 2012. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements 100 ANNUAL REPORT 2012 even when determined to be effective and can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Deloitte Hadjipavlou, Sofianos & Cambanis S.A. (“Deloitte”), our independent registered public accounting firm, has audited the Financial Statements included herein and our internal control over financial reporting and has issued an attestation report on the effectiveness of our internal control over financial reporting which is reproduced in its entirety in Item 15(c) below. c. Attestation Report of the Registered Public Accounting Firm. To the Board of Directors and Unitholders of Capital Product Partners L.P., Majuro, Republic of the Marshall Islands We have audited the internal control over financial reporting of Capital Product Partners L.P. (the “Partnership”) as of Decem- ber 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Or- ganizations of the Treadway Commission. The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the ac- companying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opin- ion on the Partnership’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effec- tiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the cir- cumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s prin- cipal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally ac- cepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authori- zations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detec- tion of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial state- ments. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the poli- cies or procedures may deteriorate. In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of De- cember 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Spon- soring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2012 of the Partnership and our report dated Feb- ruary 5, 2013 expressed an unqualified opinion on those financial statements. /s/ Deloitte Hadjipavlou, Sofianos, & Cambanis S.A. Athens, Greece February 5, 2013 101 ANNUAL REPORT 2012 d. Changes in Internal Control over Financial Reporting There have been no changes in our internal controls over financial reporting during the year covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Item 16A. Audit Committee Financial Expert. Our board of directors has determined that director Abel Rasterhoff, the chairman of our audit committee, qualifies as an audit com- mittee financial expert for purposes of the U.S. Sarbanes-Oxley Act of 2002 and is independent under applicable Nasdaq Global Mar- ket and SEC standards. Item 16B. Code of Ethics. Our board of directors has adopted a Code of Business Conduct and Ethics that includes a Code of Ethics (the “Code”) that applies to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions, including employees of our manager, Capital Ship Management Corp. This document is available under “Corporate Governance” in the Investor Relations area of our web site (www.capitalpplp.com). We will also provide a hard copy of our Code free of charge upon written request. We intend to disclose, under “Corporate Governance” in the Investor Relations area of our web site, any waivers to or amendments of the Code for the benefit of any of our directors and executive officers within five business days of such waiver or amendment. Item 16C. Principal Accountant Fees and Services. Our principal accountant for 2012 and 2011 was Deloitte. The following table shows the fees we paid or accrued for audit services provided by Deloitte for these periods (in thousands of U.S. Dollars). Fees Audit Fees (1) Audit-Related Fees Tax Fees (2) Total 2012 $ 478.6 – 30.1 $ 508.7 2011 $ 565.0 – 35.1 $ 600.1 (1) (2) Audit fees represent fees for professional services provided in connection with the audit of our Financial Statements included herein, review of our quarterly consolidated financial statements, audit services provided in connection with other regulatory filings, issuance of consents and assistance with and review of documents filed with the SEC. Tax fees represent fees for professional services provided in connection with various U.S. income tax compliance and infor- mation reporting matters. The audit committee of our board of directors has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the audit committee or entered into pursuant to de- tailed pre-approval policies and procedures established by the audit committee, as long as the audit committee is informed on a time- ly basis of any engagement entered into on that basis. The audit committee separately pre-approved all engagements and fees paid to our principal accountant in 2012 and 2011. Item 16D. Exemptions from the Listing Standards for Audit Committees. None. Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. In May 2012 we announced an agreement to issue $140.0 million of Class B Units to a group of investors including amongst oth- ers, Capital Maritime. As of June 6, 2012, we had completed the issuance and sale of 15,555,554 Class B Units, of which 3,433,333 were issued to Capital Maritime. During the year ended December 31, 2012, neither the issuer nor any affiliated persons purchased any equity securities registered by the issuer pursuant to section 12 of the Exchange Act. As of December 31, 2012, the Marinakis fam- 102 ily, including Evangelos M. Marinakis, our chairman, may be deemed to beneficially own a 30.3% interest in us through its beneficial ownership, amongst others, of Capital Maritime, and of Crude Carriers Investments. ANNUAL REPORT 2012 Item 16F. Change in Registrant’s Certifying Accountant. Not applicable. Item 16G. Corporate Governance. The Nasdaq Global Market requires limited partnerships with listed units to comply with its corporate governance standards. As a foreign private issuer, we are not required to comply with all of the rules that apply to listed U.S. limited partnerships. However, we have generally chosen to comply with most of the Nasdaq Global Market’s corporate governance rules as though we were a U.S. lim- ited partnership. Although we are not required to have a majority of independent directors on our board of directors or to establish a compensation committee or a nominating/corporate governance committee our board of directors has established an audit committee and a conflicts committee comprised solely of independent directors. Accordingly, we do not believe there are any significant differ- ences between our corporate governance practices and those that would typically apply to a U.S. domestic issuer that is a limited part- nership under the corporate governance standards of the Nasdaq Global Market. Please see “Item 6C: Board Practices” and “Item 10B: Memorandum and Articles of Association” for more detail regarding our corporate governance practices. 103 ANNUAL REPORT 2012 PART III _______________________ Item 17. Financial Statements Not Applicable. Item 18. Financial Statements INDEX TO FINANCIAL STATEMENTS CAPITAL PRODUCT PARTNERS L.P. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2012 and 2011 Consolidated Statements of Comprehensive (Loss)/ Income for the years ended December 31, 2012, 2011 and 2010 Consolidated Statement of Changes in Partners’ Capital/ Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 Notes to the Consolidated Financial Statements Page F-1 F-2 F-3 F-4 F-7 F-8 104 ANNUAL REPORT 2012 Item 19. Exhibits The following exhibits are filed as part of this Annual Report: Exhibit No. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33 4.34 4.35 4.36 4.37 4.38 Description Certificate of Limited Partnership of Capital Product Partners L.P. (1) First Amended and Restated Agreement of Limited Partnership of Capital Product Partners L.P. (2) Amendment to Capital Product Partners Amended and Restated Agreement of Limited Partnership (7) Second Amended and Restated Agreement of Limited Partnership of Capital Product Partners L.P. dated February 22, 2010 (8) Amendment to Second Amended and Restated Agreement of Limited Partnership of Capital Product Partners L.P. dated September 30, 2011 (9) Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Capital Product Partners L.P. dated September 30, 2011 (15) Certificate of Formation of Capital GP L.L.C. (1) Limited Liability Company Agreement of Capital GP L.L.C. (1) Certificate of Formation of Capital Product Operating GP L.L.C. (1) Revolving $370.0 Million Credit Facility dated March 22, 2007 (1) First Supplemental Agreement to Revolving $370.0 million Credit Facility dated September 19, 2007 (3) Second Supplemental Agreement to Revolving $370.0 Million Credit Facility dated June 11, 2008 (4) Third Supplemental Agreement to Revolving $370.0 Million Credit Facility dated April 7, 2009 (7) Fourth Supplemental Agreement to Revolving $370.0 Million Credit Facility dated April 8, 2009 (7) Fifth Supplemental Agreement to Revolving $370.0 Million Credit Facility dated October 2, 2009 (7) Sixth Supplemental Agreement to Revolving $370.0 Million Credit Facility dated June 30, 2010 (10) Seventh Supplemental Agreement to Revolving $370.0 Million Credit Facility dated November 30, 2010 (10) Eighth Supplemental Agreement to Revolving $370.0 Million Credit Facility dated December 23, 2011 (14) Ninth Supplemental Agreement to Revolving $370.0 Million Credit Facility dated May 21, 2012 (15) Revolving $350.0 Million Credit Facility dated March 19, 2008 (3) First Supplemental Agreement to Revolving $350.0 million Credit Facility dated October 2, 2009 (7) Second Supplemental Agreement to Revolving $350.0 million Credit Facility dated June 30, 2010 (10) Third Supplemental Agreement to Revolving $350.0 million Credit Facility dated May 21, 2012 (15) Fourth Supplemental Agreement to Revolving $350.0 million Credit Facility dated December 21, 2012 Loan Agreement with Emporiki Bank Of Greece S.A. dated June 9, 2011 (14) Supplemental Letter to Loan Agreement with Emporiki Bank of Greece S.A. dated May 21, 2012 (15) Omnibus Agreement (1) Amended and Restated Omnibus Agreement dated September 30, 2011(9) Management Agreement with Capital Ship Management (1) Amendment 1 to Management Agreement with Capital Ship Management dated September 24, 2007 (3) Amendment 2 to Management Agreement with Capital Ship Management dated March 27, 2008 (3) Amendment 3 to Management Agreement with Capital Ship Management dated April 30, 2008 (4) Amendment 4 to Management Agreement with Capital Ship Management dated April 7, 2009 (7) Amendment 5 to Management Agreement with Capital Ship Management dated April 13, 2009 (7) Amendment 6 to Management Agreement with Capital Ship Management dated April 30, 2009 (7) Amendment 7 to Management Agreement with Capital Ship Management dated March 1, 2010 (10) Amendment 8 to Management Agreement with Capital Ship Management dated June 30, 2010 (10) Amendment 9 to Management Agreement with Capital Ship Management dated August 13, 2010 (10) Amended and Restated Management Agreement with Capital Ship Management dated January 1, 2012 (14) Floating Rate Management Agreement with Capital Ship Management Corp. dated June 9, 2011(14) Amendment 1 to Floating Rate Management Agreement with Capital Ship Management Corp. dated August 4, 2011 (14) Amendment 2 to Floating Rate Management Agreement with Capital Ship Management Corp. dated December 5, 2011 (14) Amendment 3 to Floating Rate Management Agreement with Capital Ship Management Corp. dated April 18, 2012 Amendment 4 to Floating Rate Management Agreement with Capital Ship Management Corp. dated June 13, 2011 Amendment 5 to Floating Rate Management Agreement with Capital Ship Management Corp. dated August 26, 2012 Amendment 6 to Floating Rate Management Agreement with Capital Ship Management Corp. dated September 15, 2012 Amendment 7 to Floating Rate Management Agreement with Capital Ship Management Corp. dated December 22, 2012 105 ANNUAL REPORT 2012 4.39 4.41 4.42 4.43 4.44 4.45 4.46 4.47 4.48 4.49 4.50 4.51 4.52 4.53 4.54 4.55 4.56 4.57 4.58 4.59 4.60 4.61 4.62 4.63 4.64 4.65 4.66 4.67 4.68 4.69 4.70 4.71 4.72 4.73 8.1 12.1 12.2 13.1 13.2 Amendment 8 to Floating Rate Management Agreement with Capital Ship Management Corp. dated December 24, 2012 Administrative Services Agreement with Capital Ship Management (1) Amendment 1 to Administrative Services Agreement with Capital Ship Management Corp. dated April 2, 2012 Contribution and Conveyance Agreement for Initial Fleet (1) Share Purchase Agreement for 2007 and 2008 Vessels (1) Share Purchase Agreement for M/T Attikos dated September 24, 2007 (3) Share Purchase Agreement for M/T Amore Mio II dated March 27, 2008 (3) Share Purchase Agreement for M/T Aristofanis dated April 30, 2008 (4) Share Purchase Agreement for M/T Agamemnon II dated April 3, 2009 (7) Share Purchase Agreement for M/T Ayrton II dated April 12, 2009 (7) Share Purchase Agreement for M/T Atrotos (El Pipila) dated February 22, 2010 (10) Share Purchase Agreement for M/T Alkiviadis dated June 30, 2010 (10) Share Purchase Agreement for M/T Assos (Insurgentes) dated August 13, 2010 (10) Share Purchase Agreement for M/V Cape Agamemnon dated June 9, 2011 (14) Share Purchase Agreement for M/T Archimidis dated December 22, 2012 Share Purchase Agreement for M/T Agamemnon dated December 22, 2012 Capital Product Partners L.P. 2008 Omnibus Incentive Compensation Plan dated April 29, 2008 (5) Capital Product Partners L.P. 2008 Omnibus Incentive Compensation Plan amended July 22, 2010 (10) Crude Carriers Corp. Equity Incentive Plan dated March 1, 2010 (11) Form of Management Agreement between Crude Carriers Corp. and Capital Ship Management Corp. (11) Amendment No.1 to Crude Carriers Management Agreement dated August 5, 2010 (12) Amendment No.2 to Crude Carriers Management Agreement dated August 6, 2010 (12) Form of Share Purchase Agreement between Crude Carriers Corp. and Capital Maritime & Trading Corp. for Cooper Con- sultants Co. (11) Form of Share Purchase Agreement between Crude Carriers Corp. and Capital Maritime & Trading Corp. for Alexander the Great Carriers Corp. (11) Form of Share Purchase Agreement between Crude Carriers Corp. and Capital Maritime & Trading Corp. for Achilleas Carriers Corp. (11) Memorandum of Agreement for acquisition of M/T Amoureux dated April 19, 2010 (12) Memorandum of Agreement for acquisition of M/T Aias dated April 19, 2010 (12) Form Restricted Unit Award of Capital Product Partners L.P. (10) Agreement between Capital Product Partners and Capital GP L.L.C. dated January 30, 2009 (6) Agreement and Plan of Merger by and among Capital Product Partners L.P., Capital GP L.L.C., Poseidon Project Corp. and Crude Carriers Corp., dated as of May 5, 2011. (13) Subscription Agreement dated May 11, 2012 (15) Registration Rights Agreement dated May 22, 2012 (15) Subscription Agreement dated June 6, 2012 (16) Registration Rights Agreement dated June 6, 2012 (16) List of Subsidiaries of Capital Product Partners L.P. Rule 13a-14(a)/15d-14(a) Certification of Capital Product Partners L.P.’s Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification of Capital Product Partners L.P.’s Chief Financial Officer Capital Product Partners L.P. Certification of Ioannis E. Lazaridis, Chief Executive Officer, pursuant to 18 U.S.C. Sec- tion 1350, as adopted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002* Capital Product Partners L.P. Certification of Ioannis E. Lazaridis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002* Consent of Deloitte Hadjipavlou, Sofianos & Cambanis S.A. Consent of Deloitte Hadjipavlou, Sofianos & Cambanis S.A. 15.1 15.2 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1) Previously filed as an exhibit to Capital Product Partners L.P.’s Registration Statement on Form F-1 (File No. 333-141422), 106 ANNUAL REPORT 2012 filed with the SEC on March 19, 2007 and hereby incorporated by reference to such Registration Statement. Previously filed as Appendix A to the Partnership’s Rule 424(b)(4) Prospectus filed with the SEC on March 30, 2007, and hereby incorporated by reference to this Annual Report. Previously filed as an exhibit to the registrant’s Annual Report on Form 20-F for the year ended December 31, 2007 and filed with the SEC on April 4, 2008. Previously filed as an exhibit to the registrant’s Registration Statement on Form F-3 filed with the SEC on August 29, 2008. Previously filed as a Current Report on Form 6-K with the SEC on April 30, 2008. Previously filed as an exhibit to the registrant’s Annual Report on Form 20-F for the year ended December 31, 2008 and filed with the SEC on March 27, 2009. Previously filed as an exhibit to the registrant’s Annual Report on Form 20-F for the year ended December 31, 2009 and filed with the SEC on February 4, 2010. Previously filed as a Current Report on Form 6-K with the SEC on February 24, 2010. Previously filed as a Current Report on Form 6-K with the SEC on September 30, 2011. Previously filed as an exhibit to the registrant’s Annual Report on Form 20-F for the year ended December 31, 2010 and filed with the SEC on February 4, 2011. Previously filed as an exhibit to Crude Carriers Corp.’s Registration Statement on Form F-1 (File No.333-165138), filed with the SEC on March 1, 2010, and incorporated by reference to such Registration Statement. Previously filed as an exhibit to Crude Carriers Corp.’s Annual Report on Form 20-F for the year ended December 31, 2010 and filed with the SEC on April 18, 2010. Previously filed as a Current Report on Form 6-K with the SEC on May 9, 2011. Previously filed as an exhibit to the registrant’s Annual Report on Form 20-F for the year ended December 31, 2011 and filed with the SEC on February 13, 2011. Previously furnished as a Current Report on Form 6-K with the SEC on May 23, 2012. Previously furnished as a Current Report on Form 6-K with the SEC on June 6, 2012. Furnished only and not filed (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) * SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL PRODUCT PARTNERS L.P., By: Capital GP L.L.C., its general partner By: /s/ Ioannis E. Lazaridis Name: Ioannis E. Lazaridis Title: Chief Executive Officer and Chief Financial Officer of Capital GP L.L.C. Dated: February 5, 2013 107 ANNUAL REPORT 2012 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Unitholders of Capital Product Partners L.P., Majuro, Republic of the Marshall Islands. We have audited the accompanying consolidated balance sheets of Capital Product Partners L.P. (the “Partnership”) as of Decem- ber 31, 2012 and 2011, and the related consolidated statements of comprehensive (loss)/income, changes in partners’ capital/ stock- holders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi- nancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Capital Prod- uct Partners L.P. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Partnership’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated Feb- ruary 5, 2013 expressed an unqualified opinion on the Partnership’s internal control over financial reporting. /s/ Deloitte Hadjipavlou, Sofianos, & Cambanis S.A. Athens, Greece February 5, 2013 F-1 ANNUAL REPORT 2012 Capital Product Partners L.P. Consolidated Balance Sheets (In thousands of United States Dollars, except number of units) Assets Current assets Cash and cash equivalents Trade accounts receivable, net Prepayments and other assets Inventories Total current assets Fixed assets Vessels, net (Note 5) Total fixed assets Other non-current assets Trade accounts receivable, net Above market acquired charters (Note 6) Deferred charges, net Restricted cash (Notes 2, 7) Total non-current assets Total assets Liabilities and Partners’ Capital Current liabilities Current portion of long-term debt (Note 7) Trade accounts payable Due to related parties (Note 4) Derivative instruments (Note 8) Accrued liabilities (Note 9) Deferred revenue (Note 4) Total current liabilities Long-term liabilities Long-term debt (Note 7) Deferred revenue Derivative instruments (Note 8) Total long-term liabilities Total liabilities Commitments and contingencies (Note 16) Partners’ capital General Partner Limited Partners - Common (69,372,077 units issuedand outstanding at December 31, 2012 and 2011) Limited Partners - Preferred (15,555,554 Class B units issued and outstanding at December 31, 2012) Accumulated other comprehensive loss (Notes 2, 8) Total partners’ capital Total liabilities and partners’ capital December 31, 2012 December 31, 2011 $ $ $ 43,551 2,346 1,259 2,333 49,489 959,550 959,550 848 47,720 2,021 10,500 1,020,639 1,070,128 - 4,776 17,447 467 2,781 10,302 35,773 458,365 2,162 - 460,527 496,300 - 9,049 425,497 $ $ $ 53,370 3,415 1,496 4,010 62,291 1,073,986 1,073,986 - 51,124 2,138 6,750 1,133,998 1,196,289 18,325 8,460 10,572 8,255 2,286 7,739 55,637 615,255 3,649 4,422 623,326 678,963 - 11,005 517,545 139,744 (462) 573,828 1,070,128 $ - (11,224) 517,326 1,196,289 $ The accompanying notes are an integral part of these consolidated financial statements. F-2 ANNUAL REPORT 2012 Capital Product Partners L.P. Consolidated Statements of Comprehensive (Loss) / Income (In thousands of United States Dollars, except number of units and net (loss) / income per unit) For the years ended December 31, $ Revenues Revenues – related party (Note 4) Total revenues Expenses: Voyage expenses (Note 10) Voyage expenses – related party (Notes 4, 10) Vessel operating expenses – related party (Notes, 4, 10) Vessel operating expenses (Note 10) General and administrative expenses (Note 4) Gain on sale of vessels to third parties (Note 5) Depreciation (Note 5) Vessels’ impairment charge (Note 5) Operating income Non operating income (expense), net: Gain from bargain purchase (Note 3) Other income (expense): Interest expense and finance cost Gain on interest rate swap agreement (Note 8) Interest and other income Total other expense, net Partnership’s Net (loss) / income Less: Net income attributable to CMTC operations Net (loss) / income Preferred unit holders’ interest in Partnership’s net income General Partner’s interest in Partnership’s net (loss) / income $ Common unit holders’ interest in Partnership’s net (loss) / income $ Limited Partner’s net (loss) / income per (Note 15): • Common units (basic and diluted) Weighted-average units outstanding: • Common units (basic and diluted) Comprehensive (loss)/ income: Partnership’s net (loss)/ income Other Comprehensive income: Unrealized gain on derivative instruments (Note 8) Comprehensive (loss)/income: $ $ $ $ 2012 84,012 69,938 153,950 5,114 554 23,634 22,12 9,159 (1,296) 48,235 43,178 3,246 - (26,658) 1,448 775 (24,435) (21,189) - (21,189) 10,809 (640) (31,358) (0.46) 68,256,072 (21,189) 10,762 (10,427) $ 2011 98,517 31,799 130,316 11,565 165 30,516 4,949 10,609 - 37,214 - 35,298 82,453 (33,820) 2,310 879 (30,631) 87,120 - 87,120 - 1,742 85,378 1.78 47,138,336 87,120 17,518 104,638 $ $ $ $ $ $ 2010 113,562 11,030 124,592 7,009 - 30,261 1,034 3,506 - 31,464 - 51,318 - (33,259) - 860 (32,399) 18,919 983 17,936 - 359 17,577 0.54 32,437,314 18,919 4,426 23,345 $ $ $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. F-3 ANNUAL REPORT 2012 Capital Product Partners L.P. Consolidated Statements of Changes in Partners’ Capital/ Stockholders’ Equity (In thousands of United States Dollars) General Common Stockholders’ Partner Equity Common Total $ 31,224 983 (32,207) Balance at January 1, 2010 Dividends declared and paid to unitholders (Note 13) Issuance of Partnership units (Note 13) Equity compensation expense (Note 14) Net income attributable to CMTC Equity of contributed companies retained by CMTC (Note 13) Partnership’s net income Excess of purchase price over acquired assets (Note 1) Other Comprehensive Income (Note 8) Balance at December 31, 2010 $ $ 3,803 $ 186,493 $ 190,296 (674) 2,305 (32,991) 101,297 782 (33,665) 103,602 782 359 17,577 17,936 (209) (10,240) (10,449) Accumulated Other Comprehensive Loss $ (33,168) Total $ 188,352 (33,665) 103,602 782 983 (32,207) 17,936 (10,449) - $ 5,584 $ 262,918 $ 268,502 4,426 $ (28,742) 4,426 $ 239,760 F-4 ANNUAL REPORT 2012 Capital Product Partners L.P. Consolidated Statements of Changes in Partners’ Capital/ Stockholders’ Equity - Continued (In thousands of United States Dollars) General Partner Common Total Total Accumulated Other Comprehensive Loss (902) $ 5,584 Balance at December 31, 2010 Dividends declared and paid to unitholders (Note13) Issuance of Partnership’s units for business acquisition – of Crude (Note 3) Issuance of Partnership units for business acquisition – of Patroklos Marine Corp. (Note 3) 1,470 Partnership’s net income 1,742 Fair value of Crude’s equity incentive plan attributable to precombination services (Note 3) — — Equity compensation expense (Note 14) Other comprehensive income (Note 8) Balance at December 31, 2011 3,111 $ 11,005 $ 262,918 $ 268,502 $ (28,742) $ 239,760 (44,214) (45,116) 152,448 155,559 57,055 85,378 1,505 2,455 58,525 87,120 1,505 2,455 $ 517,545 528,550 17,518 $ (11,224) (45,116) 155,559 58,525 87,120 1,505 2,455 17,518 $ 517,326 The accompanying notes are an integral part of these consolidated financial statements. F-5 ANNUAL REPORT 2012 Capital Product Partners L.P. Consolidated Statements of Changes in Partners’ Capital/ Stockholders’ Equity - Continued (In thousands of United States Dollars) General Partner Common Preferred Unitholders Unitholders Total Total Accumulated Other Comprehensive Loss $ 11,005 Balance at December 31, 2011 Distributions declared (distributions per common and preferred unit) (1,316) (Note 13) (640) Partnership’s net (loss) / income Issuance of preferred units (Note 13) — Equity compensation expense (Note 14) — Other comprehensive income (Note 8) Balance at December 31, 2012 $ 9,049 $ 517,545 $ — $ 528,550 $ (11,224) $ 517,326 (64,516) (31,358) — 3,826 (7,484) 10,809 136,419 — (73,316) (21,189) 136,419 3,826 (73,316) (21,189) 136,419 3,826 $ 425,497 $ 139,744 $ 574,290 $ 10,762 (462) 10,762 $ 573,828 The accompanying notes are an integral part of these consolidated financial statements. F-6 ANNUAL REPORT 2012 Capital Product Partners L.P. Consolidated Statements of Cash flows (In thousands of United States Dollars) Cash flows from operating activities: Net (loss) / income Adjustments to reconcile net (loss) / income to net cash provided by operating activities: Vessel depreciation Vessel impairment (Notes 3, 5) Gain from bargain purchase Amortization of deferred charges Amortization of above market acquired charters (Note 6) Equity compensation expense (Note 14) Gain on interest rate swap agreement (Note 8) Gain on sale of vessels to third parties (Note 5) Changes in operating assets and liabilities: Trade accounts receivable Due from related parties Prepayments and other assets Inventories Trade accounts payable Due to related parties Accrued liabilities Deferred revenue Net cash provided by operating activities Cash flows from investing activities: Vessel acquisitions and improvements (Notes 3, 5) Acquisition of above market bare-boat charter (Note 6) Additions to restricted cash Proceeds from sale of vessels (Notes 3, 5) Cash and cash equivalents acquired in business acquisition Purchase of short term investments Maturity of short term investments Net cash provided by / (used in) investing activities Cash flows from financing activities: Proceeds from issuance of Partnership units (Note 3) Expenses paid for issuance of Partnership units Proceeds from issuance of long-term debt (Note 7) Payments of long-term debt (Note 7) Payments of related-party debt/financing Loan issuance costs Excess of purchase price over book value of vessels acquired from entity under common control Dividends paid Net cash (used in) provided by financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental Cash Flow Information Cash paid for interest Non-Cash Investing and Financing Activities Fair value of vessels purchased, M/V Archimidis and M/V Agamemnon (Note 3, 5) Fair value of vessels sold, M/T Alexander the Great and M/T Achilleas, reduced by the net cash consideration received (Note 3, 5) Acquisition of above market time charter (Notes 3, 6) Net liabilities assumed by CMTC upon contribution of vessels to the Partnership (Note 12) Units issued to acquire Patroklos (Note 3) Capital expenditures included in liabilities Reduction in deferred offering expenses Offering expenses included in liabilities Crude’s net assets at the completion of the business acquisition (Note 12) Units issued to acquire Crude (Note 3) Fair value of Crude’s Equity Incentive Plan attributable to pre combination services (Note 3) For the years ended December 31, 2010 2011 2012 $ (21,189) 48,235 43,178 — 480 7,904 3,826 (1,448) (1,296) 221 — 237 1,677 (5,594) 7,009 480 1,078 84,798 (1,614) — (3,750) 21,299 — — — 15,935 140,000 (1,673) — (175,215) — (348) — (73,316) (110,552) (9,819) 53,370 43,551 $ 25,864 $ 133,000 $ (137,500) $ 4,500 — — $ 134 — $ 1,908 — — — $ 87,120 37,214 — (82,453) 809 5,489 2,455 (2,310) — 7,211 2 (589) 5,576 (4,600) (4,507) (247) 5,369 56,539 (27,003) — (1,500) — 11,847 — — (16,656) 1,470 — 159,580 (134,580) — (338) — (45,116) (18,984) 20,899 32,471 53,370 $ 18,919 31,464 — — 552 938 782 — — (2,717) 6 230 237 118 (570) (409) 501 50,051 (99,842) (9,000) (750) — — (81,729) 112,119 (79,202) 105,273 (1,533) — — (1,556) — (10,449) (33,665) 58,070 28,919 3,552 32,471 $ 32,210 $ 31,860 — — $ 48,551 — $ 57,055 $ 252 — — $ 211,144 $ 155,559 $ 1,505 — — — $ 31,844 — $ 175 $ 107 $ 31 — — — The accompanying notes are an integral part of these consolidated financial statements. F-7 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 1. Basis of Presentation and General Information Capital Product Partners L.P. (the “Partnership”) was formed on January 16, 2007, under the laws of the Marshall Islands. The Part- nership is an international shipping company. Its fleet of twenty five modern high specification vessels consists of four Suezmax crude oil tankers, eighteen modern medium range tankers all of which are classed as IMO II/III vessels, two post panamax container carri- er vessels and one capesize bulk carrier. Its vessels are capable of carrying a wide range of cargoes, including crude oil, refined oil prod- ucts, such as gasoline, diesel, fuel oil and jet fuel, edible oils and certain chemicals such as ethanol as well as dry cargo and containerized goods under short-term voyage charters and medium to long-term time and bareboat charters. The consolidated financial statements include the following vessel-owning companies and operating companies which were all incorporated or formed under the laws of the Marshall Islands and Liberia. Subsidiary Capital Product Operating GP LLC Crude Carriers Corp.(6) Crude Carriers Operating Corp. (6) Shipping Rider Co. Canvey Shipmanagement Co. Centurion Navigation Limited Polarwind Maritime S.A. Carnation Shipping Company Apollonas Shipping Company Tempest Maritime Inc. Iraklitos Shipping Company Epicurus Shipping Company Laredo Maritime Inc. Lorenzo Shipmanagement Inc. Splendor Shipholding S.A. Ross Shipmanagement Co. Sorrel Shipmanagement Inc. Baymont Enterprises Incorporated Forbes Maritime Co. Wind Dancer Shipping Inc. Belerion Maritime Co. Mango Finance Corp. Navarro International S.A. Adrian Shipholding Inc. Patroklos Marine Corp. Cooper Consultants Co. renamed to Miltiadis M II Carriers Corp. Alexander the Great Carriers Corp. Achilleas Carriers Corp. Amoureux Carriers Corp. Aias Carriers Corp. Agamemnon Container Carrier Corp. Archimidis Container Carrier Corp. Miltiadis M II Corp. Date of Incorporation 03/18/2004 08/27/2003 02/10/2004 02/11/2004 01/16/2007 10/29/2009 01/21/2010 09/16/2003 10/10/2003 11/10/2003 02/10/2004 09/12/2003 Name of Vessel Owned by Subsidiary - - - M/T Atlantas (M/T British Ensign) (1) M/T Assos (M/T Insurgentes) (1),(4) M/T Aktoras (M/T British Envoy) (1) M/T Agisilaos (1) M/T Arionas (1) M/T Avax (1) M/T Aiolos (M/T British Emissary) (1) M/T Axios (1) M/T Atrotos (M/T El Pipila) (2),(5) M/T Akeraios (2) M/T Apostolos (2) M/T Anemos I (2) M/T Attikos (3),(7) M/T Alexandros II (M/T Overseas Serifos) (2) M/T Amore Mio II (3) M/T Aristofanis (3),(8) M/T Aristotelis II (M/T Overseas Sifnos) (2) M/T Aris II (M/T Overseas Kimolos) (2) 07/14/2006 M/T Agamemnon II (3), (4) 07/14/2006 06/22/2004 06/17/2008 M/V Cape Agamemnon M/T Miltiadis M II (6) 04/06/2006 02/03/2004 05/26/2004 07/08/2004 12/29/2003 02/07/2006 M/T Ayrton II (3), (5) M/T Alkiviadis (3) 05/29/2007 02/03/2004 02/07/2006 01/24/2006 DWT - - - 36,760 47,872 36,759 36,760 36,725 47,834 36,725 47,872 47,786 47,781 47,782 47,782 12,000 51,258 159,982 12,000 51,226 51,238 51,238 36,721 179,221 162,000 01/26/2010M/T Alexander The Great (6),(9) 297,958 297,863 M/T Achilleas (6),(9) 01/26/2010 150,000 M/T Amoureux (6) 04/14/2010 150,000 M/T Aias (6) 04/14/2010 103,773 M/V Agamemnon (9) 04/19/2012 103,773 M/V Archimidis (9) 04/19/2012 - - 08/28/2012 Date acquired Date acquired by the Partnership - 09/30/2011 09/30/2011 04/04/2007 08/16/2010 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 04/04/2007 03/01/2010 05/08/2007 07/13/2007 09/20/2007 09/28/2007 09/24/2007 01/29/2008 03/27/2008 04/30/2008 06/17/2008 by CMTC - - - 04/26/2006 05/17/2006 07/12/2006 08/16/2006 11/02/2006 01/12/2007 03/02/2007 02/28/2007 05/08/2007 07/13/2007 09/20/2007 09/28/2007 01/20/2005 01/29/2008 07/31/2007 06/02/2005 06/17/2008 04/07/2009 04/13/2009 06/30/2010 06/09/2011 09/30/2011 09/30/2011 09/30/2011 09/30/2011 09/30/2011 12/22/2012 12/22/2012 - 11/24/2008 04/10/2009 03/29/2006 01/25/2011 04/26/2006 03/26/2010 06/25/2010 — — 06/28/2012 06/22/2012 - F-8 51,218 08/20/2008 08/20/2008 ANNUAL REPORT 2012 (1) Initial Vessels acquired from Capital Maritime & Trading Corp. (“CMTC”) upon consummation of the Partnership’s Initial Pub- lic Offering (“IPO”) which was completed on April 3, 2007. (2) Committed Vessels (the Partnership committed to acquire these vessels from CMTC upon consummation of the IPO). (3) Non-Contracted Vessels (vessels acquired from CMTC that were neither initial nor committed vessels). (4) Was acquired on April 4, 2007, on April 7, 2009 was exchanged with the M/T Agamemnon II and was reacquired on August 16, 2010. (5) Was acquired on May 8, 2007, on April 13, 2009 was exchanged with the M/T Ayrton II and was reacquired on March 1, 2010. (6) Were acquired upon the completion of the business acquisition of Crude Carriers Corp. (“Crude”). (7) Was sold on February 14, 2012. (8) Was sold on April 4, 2012. (9) On December 22, 2012 the M/T Alexander the Great and the M/T Achilleas were exchanged with the M/V Archimidis and the M/V Agamemnon respectively. F-9 ANNUAL REPORT 2012 Table of Contents Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 1. Basis of Presentation and General Information – Continued The Partnership Agreement provides that the Partnership’s board of directors has the power to oversee, direct the operations of, man- age and determine the strategies and policies of the Partnership. In addition under the Partnership Agreement, CMTC and its affiliates are not permitted to participate in the election of five out of the Partnership board’s eight directors. This provision ensures that a ma- jority of the directors on the Partnership’s board are elected by the Partnership’s limited unitholders that are not CMTC or its affili- ates, and since July 22, 2010 a majority of the Partnership’s board has been elected by unaffiliated unitholders. As a result, the Partnership is not considered to be under common control with CMTC therefore since July 22, 2010 the Partnership no longer accounts for vessel acquisitions from CMTC as transfer of equity interest between entities under common control. Prior to July 22, 2010, when the Partnership and CMTC were under common control, all the vessel owning companies the Partnership acquired from CMTC were recorded by the Partnership at net book value reflected by CMTC and accounted for as a combination of entities under common control or a transfer of equity interest between entities under common control. For a combination between en- tities under common control, the purchase cost provisions (as they relate to purchase business combinations involving unrelated enti- ties) explicitly do not apply; instead the method of accounting prescribed by accounting standards for such transfers is similar to pool- ing-of-interests method of accounting. Under this method, the carrying amount of assets and liabilities recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recog- nized as a result of the combination. Purchase premium or discount representing the difference between the cash consideration paid and the book value of the net assets acquired was recorded as increase or decrease to the Partners’ capital. Vessels that had an operating history as part of CMTC fleet, prior to their acquisition by the Partnership have been treated as an ac- quisition of business. As a result, transfers of equity interests between entities under common control were accounted for as if the trans- fer occurred at the beginning of the period, and prior years were retroactively adjusted to furnish comparative information similar to the pooling-of-interest method. 2. Significant Accounting Policies (a) Principles of Consolidation: The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and include the accounts of the legal entities com- prising the Partnership as discussed in Note 1. Intra-group balances and transactions have been eliminated upon consolidation. Balances and transactions with CMTC and its affiliates have not been eliminated, but are presented as balances and transactions with related parties. The Partnership’s consolidated financial statements have been prepared after giving retroactive effect to the combination of entities under common control since July 22, 2010 as described in Note 1 to the consolidated financial statements. (b) Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses recognized during the reporting pe- riod. Actual results could differ from those estimates. Additionally, these consolidated financial statements include allocations for certain expenses, including corporate overhead expenses that are normally incurred by a listed company. (c) Other Comprehensive Income: The Partnership separately records certain transactions directly as components of partners’ cap- ital / stockholders’ equity. For the years ended December 31, 2012 and 2011 other comprehensive income is comprised of changes in fair value of interest rate swaps that qualify as cash flow hedges and the amortization of the accumulated other comprehen- sive loss attributable to interest rate swaps that do not qualify as cash flow hedges. For the year ended December 31, 2010 oth- er comprehensive income is solely comprised of changes in fair values of interest rate swaps that qualify as cash flow hedges (Note 8). F-10 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 2. Significant Accounting Policies – Continued (d) Accounting for Revenue, Voyage and Operating Expenses: The Partnership generates its revenues from charterers for the char- ter hire of its vessels. Vessels are chartered on time charters, bareboat charters or voyage charters. A time charter is a contract for the use of a vessel for a specific period of time and a specified daily charter hire rate, which is generally payable monthly in ad- vance. Some of the Partnership’s time charters also include profit sharing provisions, under which the Partnership can realize ad- ditional revenues in the event that spot rates are higher than the base rates in these time charters. A bareboat charter is a contract in which the vessel owner provides the vessel to the charterer for a fixed period of time at a specified daily rate, which is gener- ally payable monthly in advance, and the charterer generally assumes all risk and costs of operation during the bareboat charter period. A voyage is deemed to commence upon the later of the completion of discharge of the vessel’s previous cargo or upon vessel arrival to the agreed upon port based on the terms of a voyage contract that is not cancelable and voyage is deemed to end upon the completion of discharge of the delivered cargo. Revenues under voyage charter agreements are recognized when a voy- age agreement exists, the price is fixed, service is provided and the collection of the related revenue is reasonably assured. Revenues are recorded over the term of the charter as service is provided and recognized on a pro-rata basis over the duration of the voyage. All of the Partnership’s time charters and bareboat charters are classified as operating leases. Revenues under operating lease arrange- ments are recognized when a charter agreement exists, charter rate is fixed and determinable, the vessel is made available to the les- see, and collection of the related revenue is reasonably assured. Revenues are recognized ratably on a straight line basis over the pe- riod of the respective time or bareboat charter. Revenues from profit sharing arrangements in time charters represent a portion of time charter equivalent (voyage income less direct expenses, divided by operating days), that exceeds the agreed base rate and are recog- nized in the period earned. Deferred revenue represents cash received in advance of being earned. The portion of the deferred revenue that will be earned within the next twelve months is classified as current liability and the rest as long term liability. Vessel voyage expenses are direct expenses to voyage revenues and primarily consist of commissions, port expenses, canal dues and bunkers. Commissions are expensed over the related charter period and all the other voyage expenses are expensed as incurred. Un- der the Partnership’s time and bareboat charter agreements, all voyages expenses, except commissions are assumed by the charterer, with the exception of Overseas Shipholding Group Inc. bareboat charter agreements where the charterer is responsible for the com- missions. For voyage charters all voyage expenses are paid by the Partnership. Vessel operating expenses presented in the consolidated financial statements mainly consisted of: • Management fees payable to the Partnership’s manager Capital Shipmanagement Corp. (the “Manager” or “CSM”) under three different types of Management agreements (Note 4); and • Actual operating expenses such as crewing, repairs and maintenance, insurance, stores, spares, lubricants and other operating ex- penses. Vessel operating expenses are expensed as incurred. (e) Foreign Currency Transactions: The functional currency of the Partnership is the U.S. Dollar because the Partnership’s vessels operate in international shipping markets that utilize the U.S. Dollar as the functional currency. The accounting records of the Partnership are maintained in U.S. Dollars. Transactions involving other currencies during the year are converted into U.S. Dol- lars using the exchange rates in effect at the time of the transactions. At the balance sheet dates, monetary assets and liabilities, which are denominated in currencies other than the U.S. Dollar, are translated into the functional currency using the exchange rate at that date. Gains or losses resulting from foreign currency transactions are included in interest and other income in the ac- companying consolidated statements of comprehensive (loss) / income. (f) Cash and Cash Equivalents: The Partnership considers highly-liquid investments such as time deposits and certificates of de- posit with an original maturity of three months or less to be cash equivalents. F-11 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 2. Significant Accounting Policies – Continued (g) Restricted cash: For the Partnership to comply with debt covenants under its credit facilities, it must maintain minimum cash deposits. Such deposits are considered by the Partnership to be restricted cash. As of December 31, 2012 and 2011, restricted cash amounted to $10,500 and $6,750, respectively, and is presented under other non-current assets. (h) Trade Accounts Receivable, Net: The amount shown as trade accounts receivable primarily consists of earned revenue that has not been billed yet or that it has been billed but not yet collected. At each balance sheet date all potentially uncollectible accounts are assessed individually for purposes of determining the appropriate provision for doubtful accounts. As of December 31, 2012 allowance for doubtful accounts amounted to $54. No allowance for doubtful accounts was accounted for as of December 31, 2011. (i) Inventories: Inventories consist of consumable bunkers, lubricants, spares and stores and are stated at the lower of cost or mar- ket value. The cost is determined by the first-in, first-out method. (j) Fixed Assets: Fixed assets consist of vessels which are stated at cost, less accumulated depreciation. Vessel cost consists of the contract price for the vessel and any material expenses incurred upon their construction (improvements and delivery expenses, on-site supervision costs incurred during the construction periods, as well as capitalized interest expense during the construc- tion period). Vessels acquired through acquisition of businesses are recorded at their acquisition date fair values. The cost of each of the Partnership’s vessels is depreciated beginning when the vessel is ready for its intended use, on a straight-line basis over the vessels’ remaining economic useful life, after considering the estimated residual value. Management estimates the scrap val- ue of the Partnership’s vessels to be $0.2 per light weight ton (LWT) and useful life to be 25 years. (k) Impairment of Long-lived Assets: An impairment loss on long-lived assets is recognized when indicators of impairment are pres- ent and the carrying amount of the long-lived asset is greater than its fair value and not believed to be recoverable. In determining future benefits derived from use of long-lived assets, the Partnership performs an analysis of the anticipated undiscounted fu- ture net cash flows of the related long-lived assets on a vessel by vessel basis. If the carrying value of the related asset exceeds its undiscounted future net cash flows, the carrying value is reduced to its fair value. Various factors including future charter rates and vessel operating costs are included in this analysis. In recent years market conditions as compared to previous years have changed significantly as a result of the global credit cri- sis and resulting slowdown in world trade. Charter rates decreased and values of assets were affected. The Partnership consid- ered these market developments as indicators of potential impairment of the carrying amount of its assets. The Partnership has performed an undiscounted cash flow test based on US GAAP as of December 31, 2012 and 2011 determining undiscounted projected net operating cash flows for the vessels and comparing them to the vessels’ carrying values. In developing estimates of future cash flows, the Partnership made assumptions about future charter rates, utilization rates, vessel operating expenses, future dry docking costs and the estimated remaining useful life of the vessels. These assumptions are based on historical trends as well as future expectations that are in line with the Partnership’s historical performance and expectations for the vessels’ uti- lization under the deployment strategy. Based on these assumptions, the Partnership determined that the undiscounted cash flows supported the vessels’ carrying amounts as of December 31, 2012 and 2011. (l) Intangible assets: The Partnership records all identified tangible and intangible assets or any liabilities associated with the ac- quisition of a business at fair value. When a business is acquired that owns a vessel with an existing charter agreement, the Part- nership determines the present value of the difference between: (i) the contractual charter rate and (ii) the prevailing market rate for a charter of equivalent duration. When determining present value, the Partnership uses Weighted Average Cost of Capital (“WACC”). The resulting above-market (assets) and below-market (liabilities) charters are amortized using straight line method as a reduction and increase, respectively, to revenues over the remaining term of the charters. (m) Deferred charges, net: are comprised mainly of fees paid to lenders for obtaining new loans or refinancing existing loans and are capitalized as deferred finance charges and amortized to “interest expense and finance cost” over the term of the respective loan using the effective interest rate method. F-12 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 2. Significant Accounting Policies – Continued (n) Pension and Retirement Benefit Obligations: The vessel-owning companies included in the consolidated financial statements employ the crew on board under short-term contracts (usually up to seven months) and accordingly, they are not liable for any pension or post retirement benefits. (o) Concentration of Credit Risk: Financial instruments which potentially subject the Partnership to significant concentrations of credit risk consist principally of cash and cash equivalents, interest rate swaps, and trade accounts receivable. The Partnership places its cash and cash equivalents, consisting mostly of deposits, and enters into interest rate swap agreements with creditworthy financial institutions rated by qualified rating agencies. A limited number of financial institutions hold the Partnership’s cash. Most of the Partnership’s revenues were derived from a few charterers. For the year ended December 31, 2012, CMTC and British Petroleum Shipping Limited accounted for 45% and 23% of the Partnership’s total revenue, respectively. For the year ended De- cember 31, 2011, British Petroleum Shipping Limited, CMTC, and Overseas Shipholding Group Inc. (“OSG”) accounted for 32%, 24% and 11% of the Partnership’s total revenue, respectively. For the year ended December 31, 2010 British Petroleum Shipping Limited, Morgan Stanley Capital Group Inc. and OSG accounted for 49%, 11% and 11% of total revenue, respectively. The Partnership does not obtain rights of collateral from its charterers to reduce its credit risk. (p) Fair Value of Financial Instruments: On January 1, 2008, the Partnership adopted the accounting guidance for Fair Value Meas- urements for financial assets and liabilities and any other assets and liabilities carried at fair value. This guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The carrying value of trade receivables, due from related parties, due to related parties, accounts payable and current accrued liabilities ap- proximates their fair value. The fair values of long-term variable rate bank loans approximate the recorded values, due to their variable interest and due to the fact the lenders have the ability to pass on their funding cost to the Partnership under certain cir- cumstances, which reflects their current assessed risk. We believe the terms of our loans are similar to those that could be pro- cured as of December 31, 2012. Interest rate swaps are recorded at fair value on the consolidated balance sheet. (q) Interest Rate Swap Agreements: The Partnership designates its derivatives based upon the intended use, and recognizes all de- rivatives as either assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of each derivative instrument are recorded depending on the intended use of the derivative and the resulting des- ignation. For a derivative that does not qualify as a hedge, changes in fair value are recognized within the consolidated state- ments of comprehensive (loss) / income. For derivatives that qualify as cash flow hedges, the changes in fair value of the ef- fective portion are recognized at the end of each reporting period in Other comprehensive income / (loss), until the hedged item is recognized in the consolidated statements of comprehensive (loss) / income. The ineffective portion of a derivative’s change in fair value is immediately recognized in the consolidated statements of comprehensive (loss) / income. (r) Net (Loss) / Income Per Limited Partner Unit: Basic net income per limited partner unit is calculated by dividing Partnership’s net income less net income allocable to preferred unit holders, general partner interest in net income (including incentive dis- tribution rights) and net income allocable to unvested units by the weighted-average number of outstanding limited partner units during the period (Note 15). Diluted net income per limited partner unit reflects the potential dilution that could occur if secu- rities or other contracts to issue limited partner units were exercised. Income Taxes: The Partnership is not subject to the payment of any income tax on its income. Instead, a tax is levied based on the tonnage of the vessels, which is included in operating expenses (Note 11). Segment Reporting: The Partnership reports financial information and evaluates its operations by charter revenues and not by the length, type of vessel or type of ship employment for its customers, i.e. time or bareboat charters. The Partnership does not use discrete financial information to evaluate the operating results for each such type of charter or vessel. Although revenue can be identified for these types of charters or vessels, management cannot and does not identify expenses, profitability or other fi- nancial information for these various types of charters or vessels. As a result, management, including the chief operating deci- sion maker, reviews operating results solely by revenue per day and operating results of the fleet, and thus the Partnership has determined that it operates as one reportable segment. Furthermore, when the Partnership charters a vessel to a charterer, the char- terer is free to trade the vessel worldwide and, as a result, the disclosure of geographic information is impracticable. (s) (t) F-13 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 2. Significant Accounting Policies – Continued (u) Omnibus Incentive Compensation Plan: Equity compensation expense represents vested and unvested units granted to employees and to non-employee directors, for their services as directors, as well as to non-employees and are included in general and ad- ministrative expenses in the consolidated statements of comprehensive (loss) / income. These units are measured at their fair value equal to the market value of the Partnership’s common units on the grant date. The units that contain a time-based serv- ice vesting condition are considered unvested units on the grant date and a total fair value of such units is recognized on a straight- line basis over the requisite service period. In addition, unvested awards granted to non-employees are measured at their then- current fair value as of the financial reporting dates until non-employees complete the service (Note 14). (v) Recent Accounting Pronouncements: There are no recent accounting pronouncements issued during 2012 whose adoption would have a material effect on the Partnership’s consolidated financial statements in the current year or expected to have an impact on future years. F-14 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions a. Agamemnon Container Carrier Corp. (M/V Agamemnon) On December 22, 2012, the Partnership acquired the shares of Agamemnon Container Carrier Corp., the vessel owning company of the M/V Agamemnon, (“Agamemnon”), from CMTC in exchange for the shares of the Partnership’s wholly owned subsidiary Achil- leas Carriers Corp., the vessel owning company of the M/T Achilleas (“Achilleas”) following the unanimous recommendation of the conflicts committee and the unanimous approval of the board of directors. The vessel at the time of her acquisition by the Partnership operated under a three year time charter, with A.P. Moller-Maersk A.S. (“Maersk”). The time charter commenced in June 2012 and the earliest expiry is in July 2015. Maersk has the option to extend the charter for up to an additional four years. The acquisition of Agamem- non was deemed accretive to the Partnership’s distributions. The Partnership accounted for the acquisition of Agamemnon as an acquisition of a business. All assets and liabilities of Agamemnon except the vessel, necessary permits and time charter agreement, were retained by CMTC. Furthermore up to the date of the exchange of Achilleas Carriers Corp., all assets and liabilities of Achilleas, except the vessel, were retained by the Partnership. CMTC has also waived any compensation for the early termination of the charter of Achilleas. The purchase price of the acquisition has been allocat- ed to the identifiable assets acquired. • Purchase Price The total purchase consideration of $70,250 is comprised of: a) $68,875 representing the fair value of Achilleas, and; b) $1,375 representing the cash consideration paid to CMTC by the Partnership. • Acquisition related costs Acquisition-related costs of approximately $5.0 are included in general and administrative expenses in the consolidated statements of comprehensive (loss) / income for the year ended December 31, 2012. • Purchase price allocation The allocation of the purchase price to acquired identifiable assets was based on their estimated fair values at the date of acquisition. The fair value allocated to each class of identifiable assets of Agamemnon was calculated as follows: Vessel Above market acquired time charter Identifiable assets Purchase price As of December 22, 2012 68,000 2,250 70,250 (70,250) $ $ $ $ • Identifiable intangible assets The following table sets forth the component of the identifiable intangible asset acquired with the purchase of Agamemnon which is being amortized over its duration on a straight-line basis as a reduction of revenue: Intangible assets Above market acquired time charter As of December 22, 2012 $ 2,250 Duration of time charter acquired 2.6 years The fair value of the above market time charter acquired was determined as the difference between the time charter rate and market rate for comparable charter on the business combination date discounted at the WACC of approximately 11%. F-15 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued a. Agamemnon Container Carrier Corp. (M/V Agamemnon) Total revenues and net income of Agamemnon since its acquisition by the Partnership were $318 and $185 respectively and included in the Partnership’s consolidated statements of comprehensive (loss) / income for the year ended December 31, 2012. • Pro Forma Financial Information The supplemental pro forma financial information was prepared using the acquisition method of accounting and is based on the fol- lowing: • The Partnership’s actual results of operations for the year ended December 31, 2012 excluding non recurring transactions such as Achilleas impairment charge of $21,614 (Note 5) as well as the actual results of operations of Achilleas for the period from January 1, 2012 to December 21, 2012 and actual acquisition related costs the Partnership incurred in connection with the ac- quisition of Agamemnon; • The Partnership’s actual results of operations for the year ended December 31, 2011 adjusted for non recurring transactions such as Achilleas impairment charge of $21,614 and actual acquisition related costs the Partnership incurred in connection with the acquisition of Agamemnon. Achilleas actual results of operations for the period from October 1, 2011 to December 31, 2011 have been excluded from the Partnership’s actual results of operations as the vessel owning company of Achilleas was a fully owned subsidiary of Crude Carriers which was merged with the Partnership on September 30, 2011 (Note 3d) and; Pro forma results of operations of Agamemnon for the period from January 1, 2012 to December 21, 2012 and for the year end- ed December 31, 2011 as if Agamemnon was operating under post acquisition revenue and cost structure. • The combined results do not purport to be indicative of the results of the operations which would have resulted had the acquisition been effected at beginning of the applicable period noted above, or the future results of operations of the combined entity. The following table summarizes total net revenues; net (loss) / income and net (loss) / income per common unit of the combined en- tity had the acquisition of Agamemnon occurred on January 1, 2011: Total revenues Partnership’s net income Partnership’s net income available to preferred unit holders General Partner’s interest in Partnership’s net (loss) / income Common unit holders interest in Partnership’s net (loss) / income Pro-forma weighted average of Partnership’s common units outstanding Net (loss) / income per common unit (basic and diluted) $ $ $ 2012 154,227 2,210 10,809 (172) (8,427) 68,256,072 (0.12) For the year ended December 31, 2 0 1 1 137,065 7 2 , 5 0 8 $ - 1 , 4 5 0 7 1 , 0 5 8 47,138,336 1 . 5 1 $ $ F-16 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued b. Archimidis Container Carrier Corp. (M/V Archimidis) ` On December 22, 2012, the Partnership acquired the shares of Archimidis Container Carrier Corp., the vessel owning company of the M/V Archimidis, (“Archimidis”), from CMTC in exchange for the shares of the Partnership’s wholly owned subsidiary Alexander The Great Carriers Corp., the vessel owning company of the M/T Alexander The Great (“Alexander The Great”) following the unanimous recommendation of the conflicts committee and the unanimous approval of the board of directors. The vessel at the time of her acquisition by the Partnership operated under a three year time charter, with Maersk. The time charter commenced in November 2012 and the ear- liest expiry is in October 2015. Maersk has the option to extend the charter for up to an additional four years. The acquisition of Archimidis was deemed accretive to the Partnership’s distributions. The Partnership accounted for the acquisition of Archimidis as an acquisition of a business. All assets and liabilities of Archimidis ex- cept the vessel, necessary permits and time charter agreement, were retained by CMTC. Furthermore up to the date of the exchange of Alexander the Great Carriers Corp., all assets and liabilities of Alexander the Great, except the vessel, were retained by the Part- nership. CMTC has also waived any compensation for the early termination of the charter of Alexander the Great. The purchase price of the acquisition has been allocated to the identifiable assets acquired. • Purchase Price The total purchase consideration of $67,250 is comprised of: a) $68,875 representing the fair value of Alexander the Great and; b) $1,625 representing the cash consideration the Partnership received by CMTC. • Acquisition related costs Acquisition-related costs of approximately $5.0 are included in general and administrative expenses in the consolidated statements of comprehensive (loss) / income for the year ended December 31, 2012. • Purchase price allocation The allocation of the purchase price to acquired identifiable assets was based on their estimated fair values at the date of acquisition. The fair value allocated to each class of identifiable assets of Archimidis was calculated as follows: Vessel Above market acquired time charter Identifiable assets Purchase price As of December 22, 2012 65,000 2,250 67,250 (67,250) $ $ $ $ • Identifiable intangible assets The following table sets forth the component of the identifiable intangible asset acquired with the purchase of Archimidis which is be- ing amortized over its duration on a straight-line basis as a reduction of revenue: Intangible assets Above market acquired time charter As of December 22, 2012 $ 2,250 Duration of time charter acquired 3.0 years The fair value of the above market time charter acquired was determined as the difference between the time charter rate and market rate for comparable charter on the business combination date discounted at the WACC of approximately 11%. F-17 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued b. Archimidis Container Carrier Corp. (M/V Archimidis) – Continued Total revenues and net income of Archimidis since its acquisition by the Partnership were $321 and $178 respectively and included in the Partnership’s consolidated statements of comprehensive (loss) / income for the year ended December 31, 2012. • Pro Forma Financial Information The supplemental pro forma financial information was prepared using the acquisition method of accounting and is based on the fol- lowing: • The Partnership’s actual results of operations for the year ended December 31, 2012 excluding non recurring transactions such as Alexander the Great impairment charge of $21,564 (Note 5) as well as the actual results of operations of Alexander the Great for the period from January 1, 2012 to December 21, 2012 and actual acquisition related costs the Partnership incurred in con- nection with the acquisition of Archimidis; • The Partnership’s actual results of operations for the year ended December 31, 2011 adjusted for non recurring transactions such as Alexander the Great impairment charge of $21,564 and actual acquisition related costs the Partnership incurred in connec- tion with the acquisition of Archimidis. Alexander the Great actual results of operations for the period from October 1, 2011 to December 31, 2011 have been excluded from the Partnership’s actual results of operations as the vessel owning company of Alexander the Great was a fully owned subsidiary of Crude Carriers which was merged with the Partnership on September 30, 2011 (Note 3d) and; Pro forma results of operations of Archimidis for the period from January 1, 2012 to December 21, 2012 and for the year end- ed December 31, 2011, as if Archimidis was operating under post acquisition revenue and cost structure. • The combined results do not purport to be indicative of the results of the operations which would have resulted had the acquisition been effected at beginning of the applicable period noted above, or the future results of operations of the combined entity. The following table summarizes total net revenues; net (loss) / income and net (loss) / income per common unit of the combined en- tity had the acquisitions of Archimidis occurred on January 1, 2011: Total revenues Partnership’s net income Partnership’s net income available to preferred unit holders General Partner’s interest in Partnership’s net (loss) / income Common unit holders interest in Partnership’s net (loss)/income Pro-forma weighted average of Partnership’s common units outstanding Net (loss)/income per common unit (basic and diluted) $ $ $ 2012 155,011 2,746 10,809 (161) (7,902) 68,256,072 (0.12) For the year ended December 31, 2 0 1 1 139,890 7 2 , 8 1 3 $ — 1 , 4 5 6 7 1 , 3 5 7 47,138,336 1 . 5 1 $ $ F-18 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued c. Patroklos (M/V Cape Agamemnon) On June 9, 2011, the Partnership acquired the shares of Patroklos Marine Corp., the vessel owning company of the M/V Cape Agamem- non (“Patroklos”), from CMTC as it was deemed accretive to the Partnership’s distributions by the board of directors. The vessel at the time of her acquisition by the Partnership operated under a ten year time charter, with Cosco Bulk Carrier Co. Ltd. (“COSCO Bulk”), an affiliate of the COSCO Group. The time charter commenced in July 2010 and the earliest expiry under the charter is in June 2020. The acquisition of Patroklos was unanimously approved by the Partnership’s Board of Directors following the unanimous approval and recommendation of the Board’s conflicts committee, which is comprised entirely of independent directors. The Partnership accounted for the acquisition of Patroklos as an acquisition of a business. All assets and liabilities of Patroklos except the vessel, necessary permits and time charter agreement, were retained by CMTC. The purchase price of the acquisition has been al- located to the identifiable assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a gain from bargain purchase. • Purchase Price The total purchase consideration of $83,525 was funded by $1,470 from available cash, $25,000 through a draw down from the Part- nership’s credit facility with Credit Agricole Emporiki Bank (Note 7) and the remaining through the issuance of 6,958,000 Partner- ship’s common units to CMTC at a price of $8.20 per unit as quoted on the Nasdaq Stock Exchange the date of the acquisition of Pa- troklos by the Partnership. Furthermore upon the acquisition of Patroklos, the Partnership issued another 142,000 of Partnership’s com- mon units. These units were converted into 142,000 of general partner units by the Partnership and delivered to Capital General Part- ner (“CGP”) in order for it to maintain its 2% interest in the Partnership. The Partnership received the amount of $1,470 in exchange for these general partner units. • Acquisition related costs Acquisition-related costs of approximately $409 are included in general and administrative expenses in the consolidated statements of comprehensive (loss) / income for the year ended December 31, 2011. • Purchase price allocation The allocation of the purchase price to acquired identifiable assets was based on their estimated fair values at the date of acquisition. The fair value allocated to each class of identifiable assets of Patroklos and the gain from bargain purchase recorded as non operating income / (expense), net in the Partnership’s consolidated statements of comprehensive (loss) / income for the year ended December 31, 2011 was calculated as follows: Vessel Above market acquired time charter Identifiable assets Purchase price Gain from bargain purchase As of June 9, 2011 51,500 48,551 100,051 (83,525) 16,526 $ $ $ $ $ The gain from bargain purchase of $16,526 has resulted from the decline of the Partnership’s common unit price as the 6,958,000 com- mon units which were issued to CMTC were valued at $8.20 per unit as quoted on the Nasdaq Stock Exchange on the day of the ac- quisition of Patroklos, as compared to the Partnership’s common unit price of $10.35 representing a value of Partnership’s common unit on the day CMTC and the Partnership agreed on the purchase consideration, including the issuance of these common units. F-19 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued c. Patroklos (M/V Cape Agamemnon) – Continued After a subsequent review and reassessment of valuation methods and procedures of the $100,051 fair value amount for identifiable assets acquired, the Partnership concluded that its measurements for the assets acquired appropriately reflect consideration of all avail- able information that existed as of the acquisition date. Therefore, the Partnership recorded a gain from bargain purchase of $16,526 in accordance with ASC Subtopic 805-30 as of the Patroklos acquisition date. • Identifiable intangible assets The following table sets forth the component of the identifiable intangible asset acquired with the purchase of Patroklos which is be- ing amortized over its duration on a straight-line basis as a reduction of revenue: Intangible assets Above market acquired time charter As of June 9, 2011 $ 48,551 Duration of time charter acquired 9.1 years The fair value of the above market time charter acquired was determined as the difference between the time charter rate and market rate for comparable charter on the business combination date discounted at the WACC of approximately 11%. Total revenues and net income of Patroklos since its acquisition by the Partnership were $5,305 and $2,899 respectively and included in the Partnership’s consolidated statements of comprehensive (loss) / income for the year ended December 31, 2011. • Pro Forma Financial Information The supplemental pro forma financial information was prepared using the acquisition method of accounting and is based on the fol- lowing: • The Partnership’s actual results of operations for the year ended December 31, 2011 excluding non recurring transactions such as gain from bargain purchase of $16,526 regarding the acquisition of Patroklos and actual acquisition related costs the Part- nership incurred in connection with the acquisition of Patroklos; • The Partnership’s actual results of operations for the year ended December 31, 2010 adjusted for non recurring transactions, such as gain from bargain purchase of $16,526 resulting from the acquisition of Patroklos and actual acquisition related costs the Partnership incurred in connection with the acquisition of Patroklos and; Pro forma results of operations of Patroklos for the period from January 1, 2011 through June 9, 2011 and for the period from its vessel’s delivery from the shipyard on July 28, 2010 to December 31, 2010 as if Patroklos was operating under post acqui- sition revenue and cost structure. • The combined results do not purport to be indicative of the results of the operations which would have resulted had the acquisition been effected at beginning of the applicable period noted above, or the future results of operations of the combined entity. The following table summarizes total net revenues; net income and net income per common unit of the combined entity had the ac- quisitions of Patroklos occurred on July 28, 2010: Total revenues Partnership’s net income General Partner’s interest in Partnership’s net income Limited Partners’ interest in Partnership’s net income Pro-forma weighted average of Partnership’s common units outstanding Net income per common unit (basic and diluted) $ $ $ $ For the year ended December 31 2 0 1 0 128,671 3 5 , 8 1 9 7 1 6 3 5 , 1 0 3 35,491,287 0 . 9 8 2011 134,473 72,807 1,456 71,351 50,314,281 1.39 $ $ F-20 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued d. Crude On September 30, 2011, the merger between the Partnership and Crude was successfully completed. The exchange ratio of this unit for share transaction was 1.56 Partnership’s common units for each Crude share. The Partnership is the surviving entity in the merg- er and continues to be structured as a master limited partnership. This transaction was deemed accretive to the Partnership’s distribu- tions in the long term and it adds to the balance sheet strength and financial flexibility of the Partnership. The Crude acquisition has been accounted for using the acquisition method of accounting. Under the acquisition method of account- ing, the total purchase price has been allocated to the all identifiable assets acquired and liabilities assumed with the excess of the fair value of assets acquired and liabilities assumed over the purchase price recorded as a gain from bargain purchase. • Purchase Price The total purchase consideration of $157,064 is comprised of: a) $155,559 representing the value of 24,344,176 Partnership’s common units that were issued to Crude’s shareholders’, based on the exchange ratio of 1.56 Partnership’s common units for each Crude share, at a price of $6.39 per unit as quoted on the Nas- daq Stock Exchange on September 30, 2011 the day of the successful closing of the acquisition and; b) $1,505 representing the fair value attributable to precombination services of Crude’s Equity Incentive Plan awards at the clos- ing of the merger on September 30, 2011. Crude’s Equity Incentive Plan awards consisted of 399,400 of Crude’s common shares which were also exchanged at a ratio of 1.56 into 623,064 Partnership’s common units at the closing of the merger. Furthermore at the closing of the acquisition of Crude the Partnership converted 499,346 of Partnership’s common units held by CMTC into 499,346 general partner units and delivered to CGP in order for it to maintain its 2% interest in the Partnership. For these units there was no cash consideration paid to the Partnership. • Acquisition related costs Acquisition-related costs of approximately $4,225 are included in general and administrative expenses in the consolidated statements of comprehensive (loss) / income for the year ended December 31, 2011. • Purchase price allocation The allocation of the purchase price to all identifiable assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition. The fair value allocated to each class of assets and liabilities of Crude and the gain from bargain purchase recorded as non operating income / (expense), net, in the Partnership’s consolidated statements of comprehensive (loss) / income for the year ended December 31, 2011 was calculated as follows: Current assets Vessels Total liabilities Net assets acquired and liabilities assumed Purchase price Gain from bargain purchase As of September 30, 2011 30,300 $ 51,750 (159,059) 222,991 (157,064) 65,927 $ $ $ The gain from bargain purchase of $65,927 has mainly resulted from: • • • the decline of the Partnership’s common unit price as the common units which were issued to Crude’s shareholders were valued at $6.39 per unit as quoted on the Nasdaq Stock Exchange on the day of the acquisition of Crude as compared to the Partner- ship’s common unit price of $11.27 used to determine the exchange ratio of the unit for share transaction; the fair value adjustments for the five crude tanker vessels comprising Crude’s fleet on the day of the acquisition and; the fair value attributable to precombination services of Crude’s Equity Incentive Plan awards included into the purchase con- sideration. F-21 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 3. Acquisitions – Continued d. Crude – Continued After a subsequent review and reassessment of valuation methods and procedures of the $222,991 fair value amount for identifiable assets acquired and liabilities assumed, the Partnership concluded that its measurements for the identifiable assets acquired and lia- bilities assumed appropriately reflect consideration of all available information that existed as of the acquisition date. As a result of the merger and based on ASC Subtopic 805-30 the Partnership recorded a gain from bargain purchase of $65,927 in its consolidated statements of comprehensive (loss) / income as of the acquisition date. Total revenues and net loss of Crude since its acquisition by the Partnership were $13,327 and $1,399 respectively and included in the Partnership’s consolidated statements of comprehensive (loss) / income for the year ended December 31, 2011. • Pro Forma Financial Information The supplemental pro forma financial information was prepared using the acquisition method of accounting and is based on the histor- ical financial information of the Partnership and Crude reflecting: • The Partnership’s actual results of operations for the year ended December 31, 2011 excluding non recurring transactions such as gain from bargain purchase of $65,927 regarding the acquisition of Crude and actual acquisition related costs the Partnership incurred in connection with the acquisition of Crude; • The Partnership’s actual results of operations for the year ended December 31, 2010 adjusted for non recurring transactions such as gain from bargain purchase of $65,927 resulting from the acquisition of Crude and actual acquisition related costs the Part- nership incurred in connection with the acquisition of Crude and; • Crude’s actual results of operations for the period from January 1, 2011 to September 30, 2011 and for the year ended Decem- ber 31, 2010. The Crude historical financial information has been adjusted to give effect to the pro forma events that are (i) di- rectly attributable to Crude acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. These adjustments include the depreciation charges as vessels’ depreciation was adjusted by replacing the Crude’s ves- sels carrying values used to calculate depreciation expense included in the historical financial information with their respective fair values as of acquisition date, adjustments to interest expense as well as adjustments to general and administrative expenses related to Crude’s equity incentive plan. The combined results do not purport to be indicative of the results of the operations which would have resulted had the acquisition been effected at beginning of the applicable period noted above, or the future results of operations of the combined entity. The following table summarizes total net revenues, net income and net income per common unit of the combined entity had the ac- quisition of Crude occurred on January 1, 2010: Total revenues Partnership’s net income General Partner’s interest in Partnership’s net income Limited Partners’ interest in Partnership’s net income Pro-forma weighted average of Partnership’s common units outstanding Net income per common unit (basic and diluted) $ $ $ $ For the year ended December 31 2010 180,474 89,613 1,792 87,821 52,069,715 1.67 2011 167,897 18,274 365 17,909 65,472,309 0.27 $ $ F-22 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 4. Transactions with Related Parties The Partnership and its subsidiaries, have related-party transactions with the Manager, due to certain terms of the following three dif- ferent types of management agreements. 1. Fixed fee management agreement: At the time of the completion of the IPO the Partnership entered into an agreement with its Manager , according to which the Manager provides the Partnership with certain commercial and technical management serv- ices for a fixed daily fee per managed vessel which covers the commercial and technical management services, the respective vessels’ operating costs such as crewing, repairs and maintenance, insurance, stores, spares, and lubricants as well as the cost of the first special survey or next scheduled dry-docking, of each vessel. In addition to the fixed daily fees payable under the management agreement, the Manager is entitled to supplementary compensation for additional fees and costs (as defined in the agreement) of any direct and indirect additional expenses it reasonably incurs in providing these services, which may vary from time to time. The Partnership also pay a fixed daily fee per bareboat chartered vessel in its fleet, mainly to cover compliance and commercial costs, which include those costs incurred by the manager to remain in compliance with the oil majors’ requirements, including vetting requirements; 2. Floating fee management agreement: On June 9, 2011, the Partnership entered into an agreement with its Manager based on ac- tual expenses with an initial term of five years per managed vessel. Under the terms of this agreement the Partnership compen- sates its Manager for expenses and liabilities incurred on the Partnership’s behalf while providing the agreed services, includ- ing, but not limited to, crew, repairs and maintenance, insurance, stores, spares, lubricants and other operating costs. Costs and expenses associated with a managed vessel’s next scheduled dry docking are borne by the Partnership and not by the Manager. The Partnership also pays its Manager a daily technical management fee per managed vessel that is revised annually based on the United States Consumer Price Index; and 3. Crude management agreement: On September 30, 2011, the Partnership completed the acquisition of Crude. The five crude tanker vessels the Partnership acquired as part of the Crude’s acquisition continue to be managed under a management agreement en- tered into in March 2010 with the Manager whose initial term expires on December 31, 2020. Under the terms of this agree- ment the Partnership compensates the Manager for all of its expenses and liabilities incurred on the Partnership’s behalf while providing the agreed services, including, but not limited to, crew, repairs and maintenance, insurance, stores, spares, lubricants and other operating and administrative costs. The Partnership also pays its Manager the following fees: (a) a daily technical management fee per managed vessel that is revised annually based on the United States Consumer Price Index; (b) a sale & purchase fee equal to 1% of the gross purchase or sale price upon the consummation of any purchase or sale of a vessel acquired by Crude Carriers; and (c) a commercial services fee equal to 1.25% of all gross charter revenues generated by each vessel for commercial services ren- dered. The Manager has the right to terminate the Crude management agreement and, under certain circumstances, could receive sub- stantial sums in connection with such termination. As of March 2012 this termination fee had been adjusted from $9,000 to $9,500. All the above three agreements constitute the “Management Agreements”. Under the terms of the fixed fee management agreement, the Manager charged the Partnership for additional fees and costs, relating to insurances deductibles, vetting, and repairs and spares that related to unforeseen events. For the years ended December 31, 2012, 2011 and 2010 such fees amounted to $1,850, $1,237 and $1,966, respectively. The 2011 charge includes a $710 adjustment in order to re- flect the claim proceeds the Partnership received for one of its vessels, the M/T Attikos. On April 4, 2007, the Partnership entered into an administrative services agreement with the Manager, pursuant to which the Manager will provide certain administrative management services to the Partnership such as accounting, auditing, legal, insurance, IT, clerical, investor relations and other administrative services. Also the Partnership reimburses CGP for all expenses which are necessary or ap- propriate for the conduct of the Partnership’s business. The Partnership reimburses the Manager and CGP for reasonable costs and ex- penses incurred in connection with the provision of these services after the Manager submits to the Partnership an invoice for such costs and expenses, together with any supporting detail that may be reasonably required. These expenses are included in general & adminis- trative expenses in the consolidated statements of comprehensive (loss) / income. F-23 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 4. Transactions with Related Parties – Continued Balances and transactions with related parties consisted of the following: Consolidated Balance Sheet Liabilities: Manager – payments on behalf of the Partnership (a) Management fee payable to CSM (b) Due to related parties Deferred revenue – current (f) Total liabilities Consolidated Statements of Comprehensive (Loss) / Income Revenues (c) Voyage expenses Vessel operating expenses General and administrative expenses (d) Interest expense and finance cost (e) As of December 31, 2012 $ $ $ 15,957 1,490 17,447 4,637 22,084 As of December 31, 2011 $ $ $ 8,138 2,434 10,572 4,225 14,797 For the year ended December 31, 2012 $ 69,938 554 23,634 3,092 — 2011 $ 31,799 165 30,516 1,630 — 2010 $ 11,030 — 30,261 1,103 210 (a) Manager - Payments on Behalf of Capital Product Partners L.P .: This line item includes the Manager payments it makes on be- half of the Partnership and its subsidiaries. (b) Management fee payable to CSM: The amount outstanding as of December 31, 2012 and 2011 represents the management fee payable to CSM as a result of the Management Agreements the Partnership entered into with the Manager. F-24 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 4. Transactions with Related Parties – Continued (c) Revenues: The following table includes information regarding the charter agreements the Partnership entered into with CMTC dur- ing 2012 and 2011. Vessel Name M/T Agisilaos M/T Agisilaos M/T Agisilaos M/T Agisilaos M/T Axios M/T Axios M/T Arionas M/T Arionas M/T Arionas M/T Alkiviadis M/T Alkiviadis M/T Amore Mio II M/T Amore Mio II M/T Avax M/T Avax M/T Akeraios M/T Akeraios M/T Apostolos M/T Miltiadis M II M/T Alexander the Great(1) M/T Amoureux M/T Aias M/T Achilleas (1) Time Charter (TC) in years 1 TC 0.42 TC 1 TC 1 TC 1 TC 1 TC 1 TC 1 TC 1 TC 2 TC 1 TC 1 TC 0.9 to 1.2TC 1 TC 1 TC 1 TC 1 TC 1 TC 1 TC 1TC 1+1+1 TC 1+1+1 TC 1TC Commencement of Charter 03/2010 03/2011 08/2011 09/2012 02/2010 06/2012 10/2010 10/2011 11/2012 06/2010 07/2012 01/2011 12/2011 05/2011 05/2012 07/2011 07/2012 09/2012 03/2012 11/2011 10/2011 11/2011 01/2012 Termination or earliest expected redelivery 03/2011 08/2011 09/2012 08/2013 03/2011 05/2013 10/2011 11/2012 10/2013 06/2012 06/2013 12/2011 03/2012 05/2012 04/2013 07/2012 06/2013 08/2013 09/2012 12/2012 11/2013 11/2013 12/2012 Gross (Net) Daily Hire Rate $12.0 ($11.9) $13.0 ($12.8) $13.5 ($13.3) $13.5 ($13.3) $12.8 ($12.6) $14.0 ($13.8) $12.0 ($11.9) $13.8 ($13.6) $13.8 ($13.6) $13.0 ($12.8) $13.4 ($13.2) $25.3 ($25.0) $18.25 ($18.0) $14.0 ($13.8) $14.0 ($13.8) $14.0 ($13.8) $14.0 ($13.8) $14.0 ($13.8) $18.3 ($18.0) $28.0 ($27.7) $20.0+$24.0+$28.0 ($19.8+$23.7+$27.7) $20.0+$24.0+$28.0 ($19.8+$23.7+$27.7) $28.0 ($27.7) (1) On December 22, 2012, the Partnership acquired the shares of the vessel owning companies of the M/V Agamemnon and the M/V Archimidis from CMTC in exchange of the shares of the vessel owning companies of the M/T Achilleas and the M/T Alexan- der The Great respectively (Note 3). (d) General and administrative expenses: This line item mainly includes internal audit, investor relations and consultancy fees. (e) Interest expense and finance cost: Interest expense for the related-party loans for the years ended December 31, 2012, 2011 and 2010 amounted to $0, $0 and $210 respectively and relates to the loans that CMTC had entered into with financial institutions for the financing of the acquisition of the shares of the vessel owning company of the M/T Atrotos and the M/T Alkiviadis when both operated under CMTC’s fleet. There were no outstanding balances in relation to these loans as of December 31, 2012 and 2011. (f) Deferred Revenue: As of December 31, 2012 and 2011 the Partnership received cash in advance for revenue earned in a subsequent period from CMTC. F-25 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 5. Vessels, net An analysis of vessels is as follows: Carrying amount as at January 1, 2011 Acquisitions and improvements Depreciation Carrying amount as at December 31, 2011 Acquisition and improvements Disposals Impairment of vessels Depreciation Carrying amount as at December 31, 2012 Net Book Value 707,339 403,861 (37,214) 1,073,986 133,105 (156,128) (43,178) (48,235) 959,550 $ $ $ All of the Partnership’s vessels as of December 31, 2012 have been provided as collateral to secure the Partnership’s credit facilities. On December 22, 2012, the Partnership acquired the shares of the vessel owning companies of two post panamax container carrier ves- sels the M/V Agamemnon and the M/V Archimidis from CMTC in exchange of the shares of the vessel owning companies of two very large crude carrier vessels the M/T Achilleas and the M/T Alexander The Great respectively (Note 3). The M/V Agamemnon and the M/V Archimidis have been recorded in the Partnership’s financial statements at their fair value as quoted by independent brokers at the time of the acquisition of $68,000 and $65,000 respectively. In relation to the transaction described above the Partnership record- ed an impairment charge of $43,178 which represents the difference between the carrying value of the M/T Achilleas and the M/T Alexan- der the Great of $180,928 and the fair market value of these vessels of $137,750 as quoted by independent brokers and is presented as “Vessels’ impairment charge” in the Partnership’s consolidated statements of comprehensive (loss) / income. The vessel-owning com- panies of the M/T Achilleas and the M/T Alexander the Great were deconsolidated from the Partnership accounts as of the date of their disposal to CMTC. Results of operations, cash flows, and assets and liabilities of these vessels prior to their disposal to CMTC are in- cluded in the Partnership’s consolidated financial statements. On February 14, 2012 the Company disposed the M/T Attikos, a 12,000 dwt chemical tanker built in 2005 for net proceeds of $9,807, to an unrelated third party. The Partnership realized a net gain on this disposal of $943 as the carrying value of the vessel at the time of her disposal was $8,864. On April 4, 2012 the Company disposed the M/T Aristofanis, a 12,000 dwt, chemical tanker built in 2005 for net proceeds of $9,867, to an unrelated third party. The Partnership realized a net gain on this disposal of $353 as the carrying value of the vessel at the time of her disposal was $9,514. During 2012 the M/T Avax, M/T Axios, M/T Akeraios, M/T Apostolos, M/T Anemos and M/T Atrotos (renamed El Pipila) underwent improvements following their respective first special survey. These costs for these six vessels amounted to $105 and were capitalized as part of the respective vessels’ historic cost. Following the acquisition of Crude, on September 30, 2011, (Note 3), the Partnership acquired the shares of the vessel owning com- panies of the M/T Alexander the Great, the M/T Achilleas, the M/T Miltiadis M II, the M/T Amoreux and the M/T Aias. These vessels have been recorded in the Partnership’s financial statements at the amount of $351,750 which represents their respective fair value at the completion of the business acquisition. On June 9, 2011 the Partnership acquired the shares of Patroklos, the vessel owning company of the M/V Cape Agamemnon for a to- tal consideration of $83,525 (Note 3). The vessel has been recorded in the Partnerships’ financial statements at its fair value at the time of acquisition of $51,500. During 2011 the M/T Amore Mio II, M/T Arionas, M/T Agisilaos and M/T Assos (renamed Insurgentes), underwent improvements fol- lowing their respective first special survey / dry docking. These costs for these four vessels amounted to $611 and were capitalized as part of the respective vessels’ historic cost. F-26 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 6. Above market acquired charters In December 22, 2012 the Partnership acquired the shares of Agamemnon and Archimidis, from CMTC with outstanding time char- ters to Maersk terminating in July, 2015 and October 2015, respectively, which were above the market rates for equivalent time char- ters prevailing at the time of acquisition. The present value of the above market acquired time charters were estimated by the Partner- ship at $2,250 each, and recorded as an asset in the consolidated balance sheet as of the acquisition date (Note 3). In June 2011 the Partnership acquired the shares of Patroklos, the vessel-owning company of M/V Cape Agamemnon from CMTC with an outstanding time charter to COSCO Bulk terminating in June, 2020, which was above the market rates for equivalent time charters prevailing at the time of acquisition. The present value of the above market acquired time charter was estimated by the Partnership at $48,551, and recorded as an asset in the consolidated balance sheet as of the acquisition date (Note 3). In August 16, 2010 the Partnership acquired the shares of Canvey Shipmanagement Co., the vessel-owning company of the M/T As- sos (renamed Insurgentes) with an outstanding bare-boat charter, which was above the market rates for equivalent bare-boat charters prevailing at the time of acquisition. The present value of the above the market acquired bare-boat charter was estimated by the Part- nership at $9,000, and was recorded as an asset in the consolidated balance sheet as of the acquisition date. For the years ended December 31, 2012, 2011 and 2010 revenues included a reduction of $7,904, $5,489 and $938 as amortization of the above market acquired charters, respectively. An analysis of above market acquired charters is as follows: Above market acquired charters M/V Cape Agamemnon $ — Carrying amount as at January 1, 2011 48,551 Acquisitions Amortization (3,008) Carrying amount as at December 31, 2011 $ 45,543 — Acquisitions Amortization (5,372) Carrying amount as at December 31, 2012 $ 40,171 M/T Assos M/V M/V Agamemnon Archimidis $ 8,062 — (2,481) $ 5,581 — (2,488) $ 3,093 $ — — — $ — 2,250 (23) $ 2,227 $ — — — $ — 2,250 (21) $ 2,229 Total $ 8,062 48,551 (5,489) $ 51,124 4,500 (7,904) $ 47,720 As of December 31, 2012 the remaining carrying amount of unamortized above market acquired time and bare-boat charters was $47,720 and will be amortized in future years as follows: M/V Cape Agamemnon 5,357 5,357 5,357 5,372 5,357 13,371 40,171 M/T Assos 2,481 612 — — — — 3,093 Year ended December 31, 2013 2014 2015 2016 2017 Thereafter Total F-27 M/V M/V Agamemnon Archimidis 863 863 501 — — — 2,227 797 797 635 — — — 2,229 Total 9,498 7,629 6,493 5,372 5,357 13,371 47,720 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 7. Long-Term Debt Long-term debt consists of the following: Bank Loans (i) (ii) (iii) Issued in April, 2007 maturing in June, 2017 Issued in March, 2008 maturing in March 2018 Issued in June 2011 maturing in March 2018 Total Less: Current portion Long-term portion Entity December 31, 2012 Capital Product Partners L.P. Capital Product Partners L.P. Capital Product Partners L.P. As of Margin As of December 31, 2011 $ 250,850 $ 366,500 $ 188,515 242,080 2 % 3 % $ 19,000 25,000 3.25 % $ 458,365 $ - $ 458,365 $ 633,580 18,325 $ 615,255 As at December 31, 2012, the amounts drawn down under the Partnership’s three credit facilities were as follows: Vessel / Entity M/T Akeraios M/T Apostolos M/T Anemos I M/T Alexandros II M/T Amore Mio II M/T Aristofanis M/T Aristotelis II M/T Aris II M/V Cape Agamemnon Crude Carriers Corp. and its subsidiaries, M/V Agamemnon and M/V Archimidis Total $ 250,850 Date 07/13/2007 09/20/2007 09/28/2007 01/29/2008 03/27/2008 04/30/2008 06/17/2008 08/20/2008 06/09/2011 09/30/2011 $ $370,000 Credit Facility (i) 46,850 56,000 56,000 48,000 — — 20,000 24,000 — — $ $350,000 Credit Facility (ii) — — — — 46,000 11,500 — 1,584 — 129,431 $25,000 Credit Facility (iii) $ — — — — — — — — 19,000 — $ 188,515 $ 19,000 Following the exchange of the M/T Achilleas with the M/V Agamemnon and the M/T Alexander the Great with the M/V Archimidis in December 2012 (Note 3), the Partnership prepaid from its available cash the amount of $5,149 and the M/V Archimidis and the M/V Agamemnon replaced the M/T Alexander the Great and the M/T Achilleas as collateral under its credit facility of $350,000. Following the issuance of Class B Convertible Preferred Units in May and June 2012 (Note 13), the Partnership prepaid debt of $149,566 across its three credit facilities by using in full the net proceeds of the issuance of $136,419 and an amount of $13,147 from its avail- able cash. Following the debt repayment of $149,566, on May 23, 2012 the Partnership’s credit facilities were amended: a) The new amortization schedule will commence in March 2016 b) the margin of the credit facility of $370,000 and $350,000 has increased to 2% and 3% respectively and c) the Partnership’s credit facility of $370,000 was converted into a term loan, and the undrawn tranche of $52,500 relating to the credit facility of $350,000 was cancelled. The Partnership’s loan of $370,000 will be repaid in 6 equal consecutive quarterly installments of $12,975 commencing in March, 2016 plus a balloon payment due in June, 2017. The Partnership’s credit facilities of $350,000 and $25,000 will be repaid in 9 equal con- secutive quarterly installments of $7,855 and $1,000 respectively commencing in March, 2016 plus a balloon payment for each facil- ity due in March, 2018. F-28 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 7. Long-Term Debt – Continued On April 4, 2012, an amount of $10,500 was repaid on the Partnership’s revolving credit facility of $370,000, from the proceeds of the disposal of its vessel M/T Aristofanis (Note 5). On February 15, 2012, an amount of $10,000 was repaid on the Partnership’s revolving credit facility of $370,000, from the proceeds of the disposal of its vessel M/T Attikos (Note 5). On June 9, 2011 the Partnership entered into a loan agreement with Credit Agricole Emporiki Bank for a credit facility of $25,000 in order to partially finance the acquisition of the shares of the vessel owning company of the M/V Cape Agamemnon from CMTC. On June 10, 2011 the Partnership drew down the amount of $25,000. This credit facility contains customary ship finance covenants and is secured and guaranteed by the vessel owning company of the M/V Cape Agamemnon. On September 30, 2011, the Partnership completed the refinancing of Crude’s outstanding debt of $134,580 using its existing $350,000 credit facility entered into in March 2008. The Partnership’s credit facilities contain customary ship finance covenants, including restrictions as to: changes in management and ownership of the mortgaged vessels, the incurrence of additional indebtedness, the mortgaging of vessels, the ratio of EBITDA to Net Interest Expenses shall be no less than 2:1, minimum cash requirement of $500 per vessel of which 50% may be constituted by un- drawn commitments under the revolving facility, as well as the ratio of net Total Indebtedness to the aggregate Market Value of the to- tal fleet shall not exceed 0.725:1. The credit facilities also contain the collateral maintenance requirement in which the aggregate av- erage fair market value, of the collateral vessels shall be no less than 125% of the aggregate outstanding amount under these facilities. Also the vessel-owning companies may pay dividends or make distributions when no event of default has occurred and the payment of such dividend or distribution has not resulted in a breach of any of the financial covenants. As of December 31, 2012 and 2011 the Partnership was in compliance with all financial debt covenants. The credit facilities have a general assignment of the earnings, insurances and requisition compensation of the respective vessel or ves- sels. Each also requires additional security, including: pledge and charge on current account; corporate guarantee from each of the twen- ty-five vessel-owning companies, and mortgage interest insurance. The Partnership’s credit facilities contain a “Market Disruption Clause” where the lenders, at their discretion, may impose additional interest margin if their borrowing rate exceeds effective interest rate (LIBOR) stated in the loan agreement with the Partnership. For the years ended December 31, 2012, 2011 and 2010 the Partnership incurred an additional interest expense in the amount of $373, $1,290 and $1,468 respectively due to the “Market Disruption Clause”. As of December 31, 2012, the amount of $55,420 of the Partnership’s credit facility of up to $350,000 had not been drawn down. F-29 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 7. Long-Term Debt – Continued For the years ended December 31, 2012, 2011 and 2010, the Partnership recorded interest expense of $25,788, $32,216 and $31,634, respectively. As of December 31, 2012 and 2011 the weighted average interest rate of the Partnership’s loan facilities was 3.11% and 5.28%, respectively. The required annual loan payments to be made subsequent to December 31, 2012 are as follows: Year ended December 31, 2013 2014 2015 2016 2017 Thereafter Total 8. Derivative Instruments $370,000 Credit $350,000 Credit Facility (i) $ — — — 51,900 198,950 — $ 250,850 $ Facility (ii) — — — 31,419 31,419 125,677 $ 188,515 $25,000 Credit Facility (iii) $ — — — 4,000 4,000 11,000 19,000 $ Total — — — 87,319 234,369 136,677 $ 458,365 The Partnership had entered into fourteen interest rate swap agreements in order to mitigate the exposure from interest rate fluctua- tions. Nine of the Partnership’s interest rate swap agreements under its $370,000 credit facility expired as of June 29, 2012 and one was terminated upon the disposal of the M/T Attikos and the M/T Aristofanis. During the year ended December 31, 2012, the Partnership terminated one interest rate swap agreement in full and one partially under its $350,000 credit facility. As of December 31, 2012 the Company holds interest rate swaps for the amount of $59,084. All derivatives are carried at fair value on the consolidated balance sheet at each period end. Balances as of December 31, 2012 and 2011 are as follows: Short-term liabilities Long-term liabilities December 31, 2012 Interest Rate Swaps Total $ $ $ 467 $ $ - $ 467 467 - 467 December 31, 2011 Interest Rate Swaps 8,255 $ $ 4,422 12,677 Total 8,255 4,422 12,677 $ $ F-30 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 8. Derivative Instruments – Continued Tabular disclosure of derivative instruments is as follows: Derivative Liabilities Balance sheet location Derivatives designated as hedging instruments – effective hedges Derivative instruments long-term liabilities. Derivative instruments short-term liabilities. Total derivatives not designated as hedging instruments – ineffective hedges Derivative instruments short-term liabilities. Total Derivative Liabilities As of December 31, 2012 Fair value As of December 31, 2011 Fair value $ $ $ $ - 100 367 467 $ $ 4,422 839 7,416 12,677 The table below shows the effective portion of the hedging relationship of the Partnership’s derivatives designated as hedging instru- ments recognized in Other Comprehensive Income (“OCI”), the realized losses from net interest rate settlements transferred from OCI into the Partnership’s consolidated statements of comprehensive (loss) / income and the amounts recognized in the consolidated state- ments of comprehensive (loss) / income arising from the hedging relationships not qualifying for hedge accounting for the years end- ed December 31, 2012, 2011 and 2010, respectively: Derivatives designated in cash flow hedging relationships recognized in OCI (Effective Portion) Amount of Loss Reclassified from OCI into consolidated statements of comprehensive (loss) / income (Effective Portion) Amount of Gain/(Loss) recognized the consolidated statements of comprehensive (loss) / income Location of Gain/(loss) Reclassified into consolidated statements of comprehensive (loss) /income (Effective Portion) Location of Gain/(loss) Recognized in the consolidated statements of comprehensive (loss) /income (ineffective portion) Change in Fair Value of hedging instrument recognized in OCI (Effective Portion) Amount of Gain recorded in OCI (Effective Portion) Interest rate swaps 2012 2011 2010 (1,903) (4,234) (17,159) Interest expense and finance cost 2012 2011 2010 2012 2011 2010 (12,665) (21,752) (21,585) 10,762 17,518 4,426 2012 2011 2010 1,448 2,310 - Gain on interest rate swap agreement The Partnership follows the accounting guidance for derivative instruments which requires disclosure that establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This guid- ance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierar- chy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and lia- bilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either di- rectly or indirectly; Level 3: Inputs are unobservable inputs for the asset or liability. F-31 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 8. Derivative Instruments – Continued The Partnership’s interest rate swap agreements, entered into pursuant to its loan agreements, are based on LIBOR swap rates. LIBOR swap rates are observable at commonly quoted intervals for the full terms of the swaps and therefore are considered Level 2 items. The fair values of the interest rate swap determined through Level 2 of the fair value hierarchy are derived principally from or corroborat- ed by observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market comparable, interest rates, yield curves and other items that allow value to be determined. Fair value of the interest rate swaps is determined using a discounted cash flow method based on market-base LIBOR swap yield curves. The fair value of the Part- nership’s interest rate swaps is the estimated value of the swap agreements at the reporting date, taking into account current interest rates and the forward yield curve and the creditworthiness of the Partnership and its counterparties. Derivatives December 31, 2011 December 31, 2012 Total $ (12,677) $ (467) Quoted Prices in Active Markets for Identical Assets (Level 1) — — Significant Other Observable Inputs (Level 2) $ (12,677) $ (467) Significant Unobservable Inputs (Level 3) — — Following the partial prepayment of the Partnership’s credit facilities in May 2012 (Note 7) resulting in the termination of one inter- est rate swap agreement, the disposal of the M/T Attikos and the M/T Aristofanis (Note 5) resulting in the termination of the one in- terest swap agreement amounting to $20,500 and the expiration of nine interest rate swap agreements in June 2012, the Partnership’s interest rate swap agreements were reduced to three. As of December 31, 2012 the interest rate swap agreement as presented in the table below qualifies as a cash flow hedge and the changes in their fair value are recognized in accumulated other comprehensive loss. Bank HSH Nordbank Currency USD Notional Amount 11,500 Fixed Rate 3.8950 % Trade date Value date Maturity date 04.24.2008 03.28.2013 04.30.2008 Fair market value as of December 31, 2012 100 Since March 31, 2012 and May 23, 2012 the interest rate swaps of $46,000 and $1,584 do not qualify as cash flow hedges and are pre- sented in the table below. As a result the amount of $1,400 and $50, which was part of the Partnership’s accumulated other compre- hensive loss (“OCL”) as of March 31, 2012 and May 23, 2012 respectively, are attributable to ineffective hedges and are being amor- tized over their respective remaining term up to their maturity date March 27, 2013 and March 28, 2013, respectively in the Partner- ship’s consolidated statements of consolidated statements of comprehensive (loss) / income by using the effective interest rate method. Bank HSH Nordbank HSH Nordbank Total derivative instruments fair value Currency USD USD Notional Amount 1,584 46,000 Fixed Rate Trade date Value date Maturity date 4.099 % 3.5250 % 08.14.2008 03.25.2008 08.20.2008 03.27.2008 03.28.2013 03.27.2013 Fair market value as of December 31, 2012 $ 14 353 $ 367 For the year ended December 31, 2012 the Partnership recorded an expense of $1,087 from the above amortization. The net result of the accumulated OCL amortization and the change of the fair value of certain interest rate swap agreements of $ 1,448 and $2,310 is presented under other non operating income (expense) net as a “Gain on interest rate swap agreement” in the Partner- ship’s consolidated statements of comprehensive (loss) / income for the years ended December 31, 2012 and 2011 respectively. F-32 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 9. Accrued Liabilities Accrued liabilities consist of the following: Accrued loan interest and loan fees Accrued operating expenses Accrued voyage expenses and commissions Accrued general and administrative expenses Total 10. Voyage Expenses and Vessel Operating Expenses Voyage expenses and vessel operating expenses consist of the following: As of December 31, 2011 2012 $ 114 $ 62 834 1,311 848 909 490 499 $ 2,286 $ 2,781 For the years ended December 31, 2010 2011 2012 Voyage expenses: Commissions Bunkers Port expenses Other Total Vessel operating expenses: Crew costs and related costs Insurance expense Spares, repairs, maintenance and other expenses Stores and lubricants Management fees Vetting, insurances, spares and repairs (Note 4) Other operating expenses Total $ 1,752 3,921 - (5) $ 5,668 $ 13,230 2,830 2,231 3,115 21,784 1,850 720 $ 45,760 $ 1,844 8,400 1,390 96 $ 11,730 $ 2,963 784 390 651 29,279 1,237 161 $ 35,465 $ 1,279 4,295 1,412 23 $ 7,009 $ 551 69 269 112 28,294 1,966 34 $ 31,295 11. Income Taxes Under the laws of the Marshall Islands, the country in which the vessel-owning subsidiaries were incorporated, these companies are not subject to tax on international shipping income. However, they are subject to registration and tonnage taxes in the country in which the vessels are registered, which have been included in vessel operating expenses in the accompanying consolidated statements of com- prehensive (loss) / income. Pursuant to Section 883 of the United States Internal Revenue Code (the “Code”) and the regulations thereunder, a foreign corpora- tion engaged in the international operation of ships is generally exempt from U.S. federal income tax on its U.S.-source shipping in- come if the foreign corporation meets both of the following requirements: (a) the foreign corporation is organized in a foreign coun- try that grants an “equivalent exemption” to corporations organized in the United States for the types of shipping income (e.g., voy- age, time, bareboat charter) earned by the foreign corporation and (b) more than 50% of the voting power and value of the foreign cor- poration’s stock is “primarily and regularly traded on an established securities market” in the United States and certain other require- ments are satisfied (the “Publicly-Traded Test”). F-33 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 11. Income Taxes – Continued The jurisdictions where the Partnership’s vessel-owning subsidiaries are incorporated each grants an “equivalent exemption” to Unit- ed States corporations with respect to each type of shipping income earned by the Partnership’s ship-owning subsidiaries. Additional- ly, our units are only traded on the Nasdaq Global Market, which is considered to be established securities market. We also believe that we satisfy the other requirements of the Publicly-Traded Test. Therefore, we have satisfied the Publicly-Traded Test for the years end- ed December 31, 2012, 2011 and 2010 and the ship-owning subsidiaries are exempt from United States federal income taxation with respect to U.S.-source shipping income. 12. Cash Flow On September 30, 2011 the acquisition of Crude was successfully completed (Note 3). As the merger agreement with Crude was a unit for share transaction no cash consideration was paid and thus the following assets and liabilities of Crude acquired in a non-cash trans- action are not included into the Partnership’s consolidated statement of cash flows for the year ended December 31, 2011. Crude’s Net Assets Trade receivables Prepayments and other assets Inventories Vessels Total assets Trade accounts payable Due to related parties Accrued liabilities Long term debt Total liabilities Total Net Assets As of September 30, 2011 $ $ 8,321 629 9,503 351,750 370,203 12,497 10,457 1,525 134,580 159,059 211,144 The following assets and liabilities were included in the balance sheets of vessel owning entities acquired from CMTC, however, these assets, liabilities and equity amounts were retained by CMTC on March 1, 2010 and June 30, 2010 when the shares of the vessel-own- ing companies of the M/T Atrotos and the M/T Alkiviadis were transferred from CMTC to the Partnership, respectively. These trans- fers have been accounted for as transfers of equity interests between entities under common control where prior years were retroac- tively adjusted as if the transfers occurred at the beginning of the earliest comparable period (Note 1). As such assets and liabilities were included in the Partnership’s balance sheet due to retrospective presentation, but were not acquired by the Partnership upon ac- quisition of the above mentioned vessel-owning entities, the cash flows for the years ended December 31, 2010 were adjusted accordingly to exclude the following amounts of assets and liabilities as they did not result in cash inflows or outflows in the Partnership’s con- solidated financial statements: F-34 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 12. Cash Flow – Continued As of December 31, 2010 Trade receivables Due from related parties Prepayments and other assets Inventories Deferred charges Total assets Trade accounts payable Accrued liabilities Borrowings Total liabilities Net liabilities assumed by CMTC upon contribution to the Partnership 1,629 13,357 76 146 65 15,273 401 332 46,384 47,117 31,844 13. Partners’ Capital / Stockholders’ Equity and Distributions General: The partnership agreement requires that within 45 days after the end of each quarter, beginning with the quarter ending June 30, 2007, all of the Partnership’s available cash will be distributed to unitholders. Definition of Available Cash: Available Cash, for each fiscal quarter, consists of all cash on hand at the end of the quarter: • • less the amount of cash reserves established by our board of directors to: • provide for the proper conduct of the Partnership’s business (including reserves for future capital expenditures and for our anticipated credit needs); comply with applicable law, any of the Partnership’s debt instruments, or other agreements; or • • provide funds for distributions to the Partnership’s unitholders and to the general partner for any one or more of the next four quarters; plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital bor- rowings made after the end of the quarter. Working capital borrowings are generally borrowings that are made under our credit agreement and in all cases are used solely for working capital purposes or to pay distributions to partners. General Partner Interest and Incentive Distribution Rights: The General Partner has a 2% interest in the Partnership as well as the incentive distribution rights. In accordance with Section 5.2(b) of the Partnership Agreement, upon the issuance of additional units by the Partnership, the general partner may elect to make a contribution to the Partnership to maintain its 2% interest. Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from op- erating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. The Partnership’s gen- eral partner as of December 31, 2012, 2011 and 2010 holds the incentive distribution rights. The following table illustrates the percentage allocations of the additional available cash from operating surplus among the unithold- ers and general partner up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Dis- tributions” are the percentage interests of the unitholders and general partner in any available cash from operating surplus that is be- ing distributed up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount,” until avail- able cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders and general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. F-35 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 13. Partners’ Capital / Stockholders’ Equity and Distributions – Continued Minimum Quarterly Distribution First Target Distribution Second Target Distribution Third Target Distribution Thereafter Total Quarterly Distribution Target Amount per Unit $0.3750 up to $0.4313 above $0.4313 up to $0.4688 above $0.4688 up to $0.5625 above $0.5625 Marginal Percentage Interest In Distributions Unitholders 98 % 98 % 85 % 75 % 50 % General Partner 2 % 2 % 15 % 25 % 50 % Distributions of Available Cash From Operating Surplus After the Subordination Period: Our Partnership agreement requires that we will make distributions of available cash from operating surplus for any quarter after the subordination period in the following man- ner: • first, 98% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and • Thereafter, in the manner described in the above table under section “General Partner Interest and Incentive Distribution Rights”. On May 23, and June 6, 2012 the Partnership entered into a Class B Convertible Preferred Unit Subscription Agreement (the “Agree- ment”) with various investors. According to this Agreement the Partnership issued 15,555,554 Class B Convertible Preferred Units to a group of investors including Kayne Anderson Capital Advisors L.P., Swank Capital LLC, Salient Partners, Spring Creek Capital LLC, Mason Street Advisors LLC and CMTC for net proceeds of $136,419. The holders of the Class B Convertible Preferred Units have the right to convert all or a portion of such Class B Convertible Preferred Units at any time into Common Units at the conversion price of $9 per Class B Convertible Preferred Unit and a conversion rate of one Common Unit per one Class B Convertible Preferred Unit. The Conversion Ratio and the Conversion Price shall be adjusted upon the occurrence of certain events as described to the Agreement. Commencing on May 23, 2015, in the event the 30-day volume-weighted average trading price (“VWAP”) and the daily VWAP of the Common Units on the National Securities Exchange on which the Common Units are listed or admitted to trading exceeds 130% of the then applicable Conversion Price for at least 20 Trading Days out of the 30 consecutive Trading Day period used to calculate the 30-day VWAP (the “Partnership Mandatory Conversion Event”) the Partnership (acting pursuant to direction and approval of the Con- flicts Committee (following consultation with the full Board of Directors), shall have the right to convert the Class B Convertible Pre- ferred Units then outstanding in whole or in part into Common Units at the then-applicable Conversion Ratio. The holders of the outstanding Class B Convertible Preferred Units as of an applicable record date shall be entitled to receive, when, as and if authorized by the Partnership’s board of directors or any duly authorized committee, out of legally available funds for such purpose, (a) first, the minimum quarterly Class B Convertible Preferred Unit Distribution Rate on each Class B Convertible Preferred Unit and (b) second, any cumulative Class B Convertible Preferred Unit Arrearage then outstanding, prior to any other distributions made in respect of any other Partnership Interests pursuant to this Agreement in cash. The minimum quarterly Class B Convertible Pre- ferred Unit Distribution Rate shall be payable quarterly which is generally expected to be February 10, May 10, August 10 and No- vember 10, or, if any such date is not a business day, the next succeeding business day. F-36 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 13. Partners’ Capital / Stockholders’ Equity and Distributions – Continued Any distribution payable on the Class B Convertible Preferred Units for any partial quarter (other than the initial distribution payable on the Class B Convertible Preferred Units for the period from May 22, 2012 through June 30, 2012 that equals to $0.26736 for each Class B Convertible Preferred Unit ) shall equal the product of the minimum quarterly Class B Convertible Preferred Unit distribu- tion rate of $0.21375 (equals to a 9.5% annual distribution rate, subject to adjustment in the cases where clause of change of control, and/or clause of cross default provisions of the “Agreement” applies). No distribution on the Class B Convertible Preferred Units shall be authorized by the board of directors or declared or paid or set apart for payment by the Partnership at such time as the terms and provisions of any agreement of the Partnership, including any agreement relating to its indebtedness, prohibits such authorization, declaration, payment or setting apart for payment or provides that such au- thorization, declaration, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such au- thorization, declaration, payment or setting apart for payment shall be restricted or prohibited by law. The foregoing, distributions with respect to the Class B Convertible Preferred Units shall accumulate as of the Class B Convertible Preferred Unit distribution payment date on which they first become payable whether or not any of the foregoing restrictions in above exist, whether or not there is suffi- cient Available Cash for the payment thereof and whether or not such distributions are authorized. A cumulative Class B Convertible Preferred Unit arrearage shall not bear interest and holders of the Class B Convertible Preferred Units shall not be entitled to any dis- tributions, whether payable in cash, property or Partnership Interests, in excess of the then cumulative Class B Convertible Preferred Unit arrearage plus the minimum quarterly Class B Convertible Preferred Unit distribution rate for such quarter. With respect to Class B Convertible Preferred Units that are converted into Common Units, the holder thereof shall not be entitled to a Class B Convertible Preferred Unit distribution and a Common Unit distribution with respect to the same period, but shall be enti- tled only to the distribution to be paid based upon the class of Units held as of the close of business on the record date for the distri- bution in respect of such period; provided , however , that the holder of a converted Class B Convertible Preferred Unit shall remain entitled to receive any accrued but unpaid distributions due with respect to such Unit on or as of the prior Class B Convertible Pre- ferred Unit distribution payment date; and provided, further , that if the Partnership exercises the Partnership Mandatory Conversion Right to convert the Class B Convertible Preferred Units pursuant to this Agreement then the holders’ rights with respect to the dis- tribution for the Quarter in which the Partnership Mandatory Conversion Notice is received is as set forth in this Agreement. On September 30, 2011 the Partnership issued 24,967,240 common units to Crude’s shareholders in connection with the acquisition of Crude. Upon the completion of the acquisition, the Partnership converted 499,346 common units into 499,346 general partner units in order to enable CGP to maintain its 2% interest in the Partnership (Note 3). In June 2011 the Partnership issued 6,958,000 common units and 142,000 general partner units to CMTC and CGP respectively in con- nection with the acquisition of the M/V Cape Agamemnon by the Partnership. In exchange of the 142,000 general partner units the Part- nership received from CGP the amount of $1,470 (Note 3). In August 2010 the Partnership successfully completed an equity offering of 5,500,000 common units, receiving proceeds of $45,460 after the deduction of the underwriters’ commissions. On the same date CMTC made a contribution of $969 to the Partnership in ex- change for the issuance of 112,245 general partner units to CGP in order for it to maintain its 2% general partner interest in the Part- nership. The underwriters’ exercised in part the overallotment options receiving an additional 552,254 common units from the Part- nership. In exchange of the issuance of these common units the Partnership received the amount of $4,540 after the deduction of the underwriters’ commissions. CMTC made a contribution of $97 to the Partnership in exchange for the issuance of 11,270 general part- ner units to CGP in order for it to maintain its 2% general partner interest in the Partnership. In February 2010 the Partnership successfully completed an equity offering of 5,800,000 common units, receiving proceeds of $48,886 after the deduction of the underwriters’ commissions. On the same date CMTC made a contribution of $1,048 to the Partnership in ex- change for the issuance of 118,367 general partner units to CGP in order for it to maintain its 2% general partner interest in the Part- nership. In March 2010 the underwriters’ exercised in part the overallotment options receiving an additional 481,578 common units from the Partnership. In exchange of the issuance of these common units the Partnership received the amount of $4,055 after the de- duction of the underwriters’ commissions. CMTC made a contribution of $87 to the Partnership in exchange for the issuance of 9,828 general partner units to CGP in order for it to maintain its 2% general partner interest in the Partnership. F-37 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 13. Partners’ Capital / Stockholders’ Equity and Distributions – Continued As of December 31, 2012 and 2011 our partners’ capital included the following units: Common units General partner units Preferred units Total partnership units As of December 31, 2012 69,372,077 1,415,757 15,555,554 86,343,388 As of December 31, 2011 69,372,077 1,415,757 - 70,787,834 During the years ended December 31, 2012, 2011 and 2010, the Partnership declared and paid dividends amounting to $73,316, $45,116 and $33,665, respectively. Changes in Common Stockholders’ Equity reflect: • • the cumulative earnings of the Non-Contracted Vessels during their operations as part of CMTC’s fleet and; the reduction in the stockholders’ equity during the year ended December 31, 2010 represents the equity which was retained by CMTC upon the contribution of the Non-Contracted Vessels to the Partnership. 14. Omnibus Incentive Compensation Plan a. Partnership’s Omnibus Incentive Compensation Plan On April 29, 2008, the Board of Directors approved the Partnership’s Omnibus Incentive Compensation Plan (the “Plan”) according to which the Partnership may issue a limited number of awards, not to exceed 500,000 units. The Plan was amended on July 22, 2010 increasing the aggregate number of restricted units issuable under the Plan to 800,000. The Plan is administered by the General Partner as authorized by the Board of Directors. The persons eligible to receive awards under the Plan are officers, directors, and executive, managerial, adminis- trative and professional employees of the Manager, or CMTC, or other eligible persons (collectively, “key persons”) as the General Part- ner, in its sole discretion, shall select based upon such factors as it deems relevant. Members of the Board of Directors are considered to be employees of the Partnership (“Employees”) for the purposes of recognition of equity compensation expense, while employees of the Man- ager, CMTC and other eligible persons under the plan are not considered to be employees of the Partnership (“Non-Employees”). Awards may be made under the Plan in the form of incentive stock options, non-qualified stock options, stock appreciation rights, dividend equiv- alent rights, restricted stock, unrestricted stock, restricted stock units and performance shares. On August 25 and 31, 2010 CGP awarded 448,000 and 347,200 unvested units to Employees and Non-Employees, respectively. Awards granted to certain Employees vest in three equal annual installments. The remaining awards will vest on August 31, 2013. All unvested units are conditional upon the grantee’s continued service as Employee and/or Non-Employee until the applicable vesting date. The unvested units will accrue distributions as declared and paid which will be retained by the custodian of the Plan until the units vest at which time they are payable to the grantee. As unvested unit grantees accrue distributions on awards that are expected to vest, such distri- butions are charged to Partner’s capital. b. Crude’s Equity Incentive Plan On March 1, 2010 Crude adopted an equity incentive plan according to which Crude issued 399,400 shares out of 400,000 restricted shares that were authorized. Members of the Board of Directors were considered to be employees of Crude (“Employees”), while employees of Crude’s affiliates and other eligible persons under this plan were not considered to be employees of Crude (“Non-Employees”). Awards grant- ed to certain Employees vest in three equal annual installments. The remaining awards will vest on August 31, 2013. All unvested shares are conditional upon the grantee’s continued service as Employee and/or Non-Employee until the applicable vesting date. The unvested shares will accrue dividends as declared and paid, which will be retained by the custodian of Crude’s equity incentive plan until the shares vest, at which time they are payable to the grantee. As unvested shares grantees accrue dividends on awards that are expected to vest, such dividends were charged to Stockholders’ equity prior to Crude’s acquisition and are charged to the Partner’s capital subsequently to the acquisition. F-38 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 14. Omnibus Incentive Compensation Plan – Continued c. Acquisition of Crude by the Partnership Upon the completion of the acquisition of Crude by the Partnership on September 30, 2011, the Crude’s Equity Incentive Plan existing that date was incorporated into the Partnership’s Plan at a ratio of 1.56 common Partnership’s unit for each Crude share. The 205,000 unvested shares of Crude’s Employee award converted to 319,800 Partnership’s unvested units and the 194,400 unvested shares of Crude’s Non-Em- ployee award converted to 303,264 Partnership’s unvested units. The terms and conditions of both plans are significantly the same and re- mained unchanged after the acquisition, with the exception of 20,000 Crude shares, which were converted to 31,200 Partnership’s units upon the completion of the acquisition. These Crude shares were held by those members of the Crude’s Independent Committee who were not des- ignated by Crude to serve as a member of the Partnership board of directors and were vested in full immediately upon the consummation of the acquisition on September 30, 2011. There were no forfeitures of awards during the year ended December 31, 2012 and 2011. The Partnership estimates the forfeitures of unvested units to be immaterial. The Partnership will, however, re-evaluate the reasonableness of its assumption at each reporting period. As of De- cember 31, 2012, the unvested units accrued $1,823 of distributions. Unvested Units Unvested on January 1, 2012 Vested Unvested on December 31, 2012 Employee equity compensation Grant-date fair value $ 3,985 1,464 $ 2,521 Units 536,666 198,531 338,135 Non-Employee equity compensation Award-date fair value $ 4,736 — $ 4,736 Units 650,464 — 650,464 For the year ended December 31, 2012, 2011, and 2010 the equity compensation expense that has been charged in the consolidated statements of comprehensive (loss) / income was $1,834, $1,358 and $420 for the Employee awards and $1,992 $1,097 and $362 for the Non-Employ- ee awards, respectively. This expense has been included in general and administrative expenses for each respective year. As of December 31, 2012, there was $1,216 of total unrecognized compensation cost related to unvested equity compensation arrange- ments granted under the Plan based on: • • the grant date unit price of $8.08 on August 25, 2010 for the Employees awards that existed before the acquisition of Crude; and the amortization of the fair value of equity compensation expense for Crude’s Employees awards attributable to post combination serv- ices determined upon the completion of the acquisition of Crude. That cost is expected to be recognized over the remaining vesting period of 0.7 years. As of December 31, 2012, there was $829 of total unrecognized compensation cost related to unvested equity compensation arrangements granted to Non-Employees under the Plan, valued based on the closing unit price of $6.58 on December 31, 2012. That cost is expected to be recognized over the remaining vesting period of 0.7 years. The Partnership has used the straight-line method to recognize the cost of the awards. 15. Net (Loss) / Income Per Unit The general partner’s, common unit holders’ and subordinated unitholders’ interests in net income are calculated as if all net income for pe- riods subsequent to April 4, 2007, were distributed according to the terms of the Partnership’s Agreement, regardless of whether those earn- ings would or could be distributed. The Partnership Agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash (Note 13), which is a contractually-defined term that generally means all cash on hand at the end of each quar- ter after establishment of cash reserves established by the Partnership’s board of directors to provide for the proper resources for the Partnership’s business. Unlike available cash, net income is affected by non-cash items. The Partnership follows the guidance relating to the Application of the Two-Class Method and its application to Master Limited Partnerships which considers whether the incentive distributions of a master limited partnership represent a participating security when considered in the calculation of earnings per unit under the Two-Class Method. F-39 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 15. Net (Loss) / Income Per Unit – Continued This guidance also considers whether the partnership agreement contains any contractual limitations concerning distributions to the incen- tive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. Under the Partnership Agreement, the holder of the incentive distribution rights in the Partnership, which is currently the CGP, assuming that there are no cumulative arrearages on common unit distributions, has the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution (Note 13). Excluding the non-cash vessels’ impairment charge and gain from bargain purchase, as this was not distributed to the Partnership’s unit hold- ers for the years ended December 31, 2012 and 2011 respectively the Partnership’s net income for the years ended December 31, 2012, 2011 and 2010 did not exceed the First Target Distribution Level, and as a result, the assumed distribution of net income did not result in the use of increasing percentages to calculate CGP’s interest in net income. All common unit equivalents were antidilutive for the year ended December 31, 2012 because the limited partners were allocated a net loss in this period. The Partnership excluded the dilutive effect of 1,187,130 and 795,200 non-vested unit awards in calculating dilutive EPU for its common unitholders as of December 31, 2011 and 2010, respectively, as they were anti-dilutive. The non-vested units are partici- pating securities because they receive distributions from the Partnership and these distributions do not have to be returned to the Partner- ship if the non-vested units are forfeited by the grantee. The Partnership, also, excluded the dilutive effect of the $10,809 dividends attributable to preferred unit holders in calculating EPU for its common unit holders as of December 31, 2012 as they were anti-dilutive. The two class method was used to calculate EPU as follows: Numerators Partnership’s net (loss) / income Less: Partnership’s net income available to preferred unit holders General Partner’s interest in Partnership’s net (loss) / income Partnership’s net (loss) / income allocable to unvested units Partnership’s net (loss) / income available to common unit holders Denominators Weighted average number of common units outstanding, basic and diluted Net (loss) / income per common unit: Basic and diluted 2012 $ (21,189) 10,809 (640) — $ (31,358) 2011 $ 87,120 — 1,742 1,571 $ 83,807 2010 $ 17,936 — 359 147 $ 17,430 68,256,072 47,138,336 32,437,314 $ (0.46) $ 1.78 $ 0.54 16. Commitments and Contingencies Various claims, suits, and complaints, including those involving government regulations and product liability, arise in the ordinary course of the shipping business. In addition, losses may arise from disputes with charterers, agents, insurance and other claims with suppliers re- lating to the operations of the Partnership’s vessels. The Partnership is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The Partnership accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able to reasonably estimate the probable exposure. Currently, the Partnership is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. An estimated loss from a contingency should be accrued by a charge to expense and a liability recorded only if all of the following condi- tions are met: • Information available prior to the issuance of the financial statement indicates that it is probable that a liability has been incurred at the date of the financial statements. • The amount of the loss can be reasonably estimated. F-40 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 16. Commitments and Contingencies — Continued (a) Lease Commitments: The vessel-owning subsidiaries of the Partnership have entered into time and bareboat charter agreements, which as of December 31, 2012 are summarized as follows: Commencement Charterer Profit Sharing (1) Gross Daily Hire Vessel Name M/V Archimidis (4) M/V Agamemnon (4) M/T Amoureux Time Charter (TC)/ Bare Boat Charter (BC) (Years) 3 + 2 + 1 + 1 TC 3 + 2 + 1 + 1 TC 1+1+1 TC of Charter 11/2012 06/2012 10/2011 A.P. Moller-Maersk A.S. A.P. Moller-Maersk A.S. CMTC (7) M/T Aias 1+1+1 TC 11/2011 CMTC (7) M/T Atlantas (M/T British Ensign) M/T Aktoras (M/T British Envoy) M/V Cape Agamemnon M/T Agisilaos M/T Arionas M/T Aiolos (M/T British Emissary) M/T Avax M/T Axios M/T Alkiviadis M/T Assos (M/T Insurgentes) M/T Atrotos (M/T El Pipila) M/T Akeraios M/T Anemos I M/T Apostolos M/T Alexandros II (8) (M/T Overseas Serifos) M/T Aristotelis II (8) (M/T Overseas Sifnos) M/T Aris II (8) (M/T Overseas Kimolos) M/T Agamemnon II M/T Ayrton II M/TAmore Mio II (6) M/T Miltiadis M II 5+3 BC 5+3 BC 10 TC 1 TC 1 TC 5+3 BC 1 TC 1 TC 1 TC 5 BC 5 BC 1 TC 3 TC 1 TC 10 BC 10 BC 10 BC 1 TC 1+1 TC 1 TC 2 TC 04/2006 07/2006 07/2010 09/2012 11/2012 03/2007 05/2012 06/2012 07/2012 04/2009 04/2009 07/2012 09/2010 9/2012 01/2008 06/2008 08/2008 01/2012 04/2012 03/2012 09/2012 B.P. Shipping Ltd B.P. Shipping Ltd COSCO Group CMTC CMTC B.P. Shipping Ltd CMTC CMTC CMTC Arrendadora Ocean Mexicana, S.A. de C.V (5) Arrendadora Ocean Mexicana, S.A. de C.V (5) CMTC Petrobras CMTC Overseas Shipholding Group Inc. (2) Overseas Shipholding Group Inc. (2) Overseas Shipholding Group Inc. (2) B.P. Shipping Ltd B.P. Shipping Ltd BP Shipping Subtec, S.A. de C.V. F-41 50/50(7) 50/50(7) 50/50(3) 50/50(3) 50/50 (3) 50/50 (3) 50/50 (3) 50/50(3) 50/50(3) Rate (Without Profit Sharing) $34.0 $34.0 $20.0 (1y)+$24.0 (1y)+$28.0 (1y) $20.0 (1y)+$24.0 (1y)+$28.0 (1y) $13.5 (3y) $13.5 (3y) $42.2 $13.5 $13.8 $15.2 (5y) $13.5 (3y) $14.0 $14.0 $13.4 $16.8 $16.8 $14.0 $14.7 $14.0 $13.0 $13.0 $13.0 50/50(3) 50/50(3) $14.0 $14.0 (1y)+$15 (1y) $17.2 $23.2 ANNUAL REPORT 2012 Capital Product Partners L.P. Notes to the Consolidated Financial Statements (In thousands of United States Dollars) 16. Commitments and Contingencies — Continued (1) (2) (3) (4) (5) (6) (7) (8) Profit sharing refers to an arrangement between vessel-owning companies and charterers to share a predetermined percentage voy- age profit in excess of the basic rate. OSG has an option to purchase each of the three STX vessels delivered or to be delivered in 2008 at the end of the eighth, ninth or tenth year of the charter, for $38,000, $35,500 and $33,000, respectively, which option is exercisable six months before the date of completion of the eighth, ninth or tenth year of the charter. The expiration date above may therefore change depending on whether the charterer exercises its purchase option. 50/50 profit share for breaching IWL (Institute Warranty Limits – applies to voyages to certain ports at certain periods of the year). M/V Archimidis and the M/V Agamemnon are employed on time charters with the industry leader Maersk at a gross day rate of US$34.0 per day with earliest redelivery in October 2015 and July 2015, respectively. Maersk has the option to extend the char- ter of both vessels for an additional four years at a gross day rate of US$31.5 and $30.5 per day, respectively for the fourth and fifth year and $32.0 per day for the final two years. If all options were to be exercised, the employment of the vessels would ex- tend to July 2019 for the M/V Agamemnon and October 2019 for the M/V Archimidis. Arrendadora has since delivered these vessels to the state-owned Mexican petroleum company Petroleos Mexicanos. For the period from March to December 2013 the rate for this charter will be $17.5. B.P. Shipping Ltd has the right to extend the charter for an additional 3-months option declarable by September 2013. The M/T ‘Aias’ and ‘Amoureux’ will be earning for the first 12 months of their time charter with CMTC a gross daily charter rate of $20.0 per day plus 50/50 profit share on actual earnings settled every 6 months. CMTC will have the option to extend the time charter employment for a second year at $24.0 per day and for a third year at $28.0 per day with the same profit share arrange- ments. On November 14, 2012, OSG made a voluntary filing for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bank- ruptcy Court for the District of Delaware. OSG has requested that the Partnership reduces the charter rates for their remaining terms to substantially lower rates. The Partnership is discussing this matter with OSG. No assurance can be given that the Part- nership will reach an agreement with OSG regarding the remaining duration and rate of the charters, and including other terms of the charter parties and the Partnership’s rights to a claim, or, if such an agreement is reached, that it will be approved by bank- ruptcy court. Future minimum charter hire receipts, excluding any profit share revenue that may arise, based on non-cancelable long-term time and bareboat charter contracts, as of December 31, 2012 were: Year ended December 31, 2013 2014 2015 2016 2017 Thereafter Total Amount $ 95,362 73,347 47,031 19,839 15,403 38,445 $ 289,427 17. Subsequent Events (a) (b) Dividends : On January 22, 2013, the Board of Directors of the Partnership declared a cash distribution of $0.2325 per common unit for the fourth quarter of 2012. The fourth quarter common unit cash distribution will be paid on February 15, 2013, to unit holders of record on February 8, 2013. Dividends : On January 22, 2013, the Board of Directors of the Partnership declared a cash distribution of $0.21375 per Class B unit for the fourth quarter of 2012. The cash distribution will be paid on February 8, 2013, to Class B unit holders of record on February 1, 2013. F-42 

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