Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2014
Business Overview: The Partnership owns and operates a fleet of five offshore shuttle tankers (Windsor Knutsen, Bodil Knutsen, Recife Knutsen, Fortaleza Knutsen, and Carmen Knutsen) under long-term time and bareboat charters with major oil and gas companies. The Partnership is majority-owned by Knutsen NYK Offshore Tankers AS ("KNOT").
Key Financial Metrics
| Metric (in US$ thousands) | Q1 2014 | Q1 2013 |
|---|---|---|
| Total Revenues | 21,774 | 13,462 |
| Operating Income | 9,354 | 3,212 |
| Net Income (Loss) | 6,424 | (3,166) |
| Earnings Per Unit (Basic & Diluted) | $0.367 | — |
| Cash Flow from Operations | 12,215 | 5,909 |
| Cash and Cash Equivalents (End of Period) | 25,338 | 626 |
| Total Debt (Current & Long-term) | 342,843 | 349,977 |
| Current Ratio (Current Assets / Current Liabilities) | 0.70 | — |
Note: Q1 2013 EPS is not presented as the Partnership structure changed significantly following the April 2013 IPO.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 62% ($8.3 million) primarily due to the inclusion of the Carmen Knutsen in results of operations following its acquisition in August 2013. Q1 2013 revenues were reduced by a one-time $3.5 million cancellation fee related to commercial management agreements.
- Profitability Turnaround: The Partnership reported a net income of $6.4 million in Q1 2014, compared to a net loss of $3.2 million in Q1 2013. The prior year loss was significantly impacted by a one-time $3.0 million entrance tax into the Norwegian tonnage tax regime.
- Expense Management: General and administrative expenses decreased by 51% ($1.1 million) due to the absence of non-recurring IPO expenses incurred in Q1 2013. Vessel operating expenses increased by 65% due to the addition of the Carmen Knutsen.
- Derivative Gains: Realized and unrealized gains on derivative instruments decreased from $347,000 in Q1 2013 to $46,000 in Q1 2014.
Outlook, Risks, and Management Commentary
- Charter Expiration Risk: BG Group notified the Partnership it will not extend the time charter for the Windsor Knutsen upon expiration. The vessel is expected to be redelivered in July-August 2014. KNOT has agreed to guarantee the hire rate if the vessel cannot be re-employed at an equal or greater rate until April 2018.
- Liquidity: Current liabilities exceeded current assets by $12.9 million as of March 31, 2014. This is largely due to mark-to-market valuations of derivative liabilities ($2.8 million) and current debt installments. Management states current resources are sufficient to meet working capital requirements for the next 12 months.
- Capital Expenditures: The Partnership estimates approximately $9.5 million in drydocking and classification survey costs for the fleet over 2014, 2016, 2017, and 2018.
- Debt Covenants: The Partnership remains in compliance with all financial covenants, including minimum liquidity ($15 million), book equity ratio (30%), and EBITDA to interest ratio (2.50).
- Distributions: A quarterly cash distribution of $0.435 per unit ($7.6 million total) was paid on May 15, 2014, for the quarter ended March 31, 2014.
Investor Verification Checklist
- Re-employment of Windsor Knutsen: Verify the status of charter negotiations for the Windsor Knutsen following the non-extension notice from BG Group.
- Debt Maturity Profile: Review the repayment schedule, noting significant balloon payments due in 2016 ($145.8 million) and 2018 ($70.8 million).
- Derivative Exposure: Confirm the net exposure to floating interest rates ($66.0 million) and the impact of potential interest rate fluctuations on future earnings.
- Related Party Transactions: Review ongoing fees paid to KNOT and affiliates for technical management, administration, and guarantee commissions.
- Insurance Claims: Monitor the final repair costs and insurance claim status for the Bodil Knutsen bow damage sustained in February 2014.