Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and nine months ended September 30, 2014
Business Overview: The Partnership owns and operates a fleet of offshore shuttle tankers under long-term time and bareboat charters. As of September 30, 2014, the fleet consisted of seven vessels. The Partnership is 40% owned by Knutsen NYK Offshore Tankers AS ("KNOT").
Key Financial Metrics
| Metric (in thousands USD) | Three Months Ended Sep 30, 2014 | Nine Months Ended Sep 30, 2014 |
|---|---|---|
| Total Revenues | $34,265 | $78,158 |
| Operating Income | $15,476 | $34,382 |
| Net Income | $12,563 | $21,484 |
| Net Cash Provided by Operating Activities | N/A | $37,720 |
| Long-Term Debt (Total) | $536,194 | $536,194 |
| Cash and Cash Equivalents | $44,439 | $44,439 |
| Earnings Per Unit (Common) | $0.544 | $1.156 |
| Cash Distributions Declared Per Unit | $0.490 | $1.360 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 67% for the three months and 53% for the nine months ended September 30, 2014, compared to the prior year periods. This growth is primarily attributed to the inclusion of the Hilda Knutsen and Torill Knutsen (acquired June 30, 2014) and the Carmen Knutsen (acquired August 1, 2013) in the results of operations.
- Profitability: Net income increased 98% for the quarter and 200% for the nine-month period. The nine-month 2013 period included a one-time entrance tax of approximately $3.0 million into the Norwegian tonnage tax regime, which was not present in the 2014 period.
- Expenses: Vessel operating expenses and depreciation increased significantly due to the expanded fleet size. Interest expense rose 51% for the quarter and 33% for the nine months due to increased debt associated with vessel acquisitions.
- Derivatives: The Partnership reported a net gain of $1.1 million on derivative instruments for the quarter (vs. a loss of $0.3 million in 2013) and a net loss of $1.2 million for the nine months (vs. a loss of $0.3 million in 2013), driven by changes in long-term swap rates.
Guidance, Outlook, and Risks
- Acquisitions and Financing: The Partnership completed the acquisition of the Hilda Knutsen and Torill Knutsen in June 2014, funded by a public equity offering of 4.6 million common units (net proceeds ~$146.7 million) and related debt refinancing. In November 2014, a new $140 million term loan was drawn to refinance the Fortaleza and Recife facility.
- Charter Status: The Windsor Knutsen was re-delivered in July 2014 after BG Group declined an extension. A new two-year time charter with BG Group commencing in October 2015 was secured. The vessel is currently chartered to KNOT until the new charter begins.
- Liquidity: As of September 30, 2014, current liabilities exceeded current assets by $2.7 million, largely due to mark-to-market valuations of derivative liabilities ($4.2 million). Management believes current resources are sufficient for the next 12 months.
- Risks: Key risks include fluctuations in oil prices affecting charter rates, interest rate volatility (partially hedged with $350 million notional swaps), foreign currency exposure (hedged with NOK forwards), and the ability to secure long-term charters for vessels upon expiration.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants, specifically the minimum EBITDA to interest ratio of 2.50 and minimum book equity ratio of 30% across the various loan facilities.
- Charter Renewals: Confirm the status of the Windsor Knutsen employment gap between July 2014 and October 2015 and the terms of the new BG Group charter.
- Derivative Exposure: Review the impact of interest rate and foreign exchange fluctuations on the $350 million notional interest rate swaps and NOK 127.9 million forward contracts.
- Capital Expenditures: Assess the estimated $15.3 million required for drydocking and classification surveys over the next four years.
- Related Party Transactions: Review ongoing fees paid to KNOT and affiliates for technical management, administration, and chartering services.