Business Context and Reporting Period
Company: KNOT Offshore Partners LP (a limited partnership formed to own and operate offshore shuttle tankers).
Reporting Period: Quarterly period ended June 30, 2013 (Form 6-K).
Key Event: The Partnership completed its Initial Public Offering (IPO) on April 15, 2013. Financial results for the three months ended June 30, 2013, reflect operations post-IPO, while comparative periods reflect the "Combined Entity" (predecessor) carved out from KNOT NYK Offshore Tankers AS.
Fleet: As of June 30, 2013, the Partnership operated four shuttle tankers (Windsor Knutsen, Bodil Knutsen, Recife Knutsen, Fortaleza Knutsen) under long-term time and bareboat charters.
Key Financial Metrics
| Metric (US$ Thousands) | Three Months Ended June 30, 2013 |
Three Months Ended June 30, 2012 |
Six Months Ended June 30, 2013 |
Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Total Revenues | 17,268 | 14,217 | 30,730 | 30,921 |
| Operating Income | 7,408 | 3,778 | 10,620 | 11,839 |
| Net Income (Loss) | 3,971 | (2,536) | 805 | (882) |
| Net Cash from Operating Activities | N/A | N/A | 10,853 | 11,407 |
| Cash and Cash Equivalents (End of Period) | 25,218 | 3,141 | 25,218 | 3,141 |
| Total Debt (Current + Long-term) | 217,453 | 347,850 | 217,453 | 347,850 |
| Earnings Per Unit (Common) | $0.317 | N/A | N/A | N/A |
Note: EPS for Q2 2013 covers the period from IPO (April 15) to June 30. No EPS is presented for 2012 due to structural changes.
Material Changes vs. Prior Period
- Revenue Growth: Three-month revenues increased 44% to $17.3 million, primarily driven by the Windsor Knutsen returning to service (it was off-hire for repairs in Q2 2012). Six-month revenues remained relatively flat ($30.7M vs $30.9M) due to the timing of the vessel's return.
- Profitability Turnaround: The Partnership reported a net income of $4.0 million for Q2 2013, compared to a net loss of $2.5 million in Q2 2012. This shift was driven by higher revenues, lower operating expenses (excluding one-time repair costs in 2012), and significantly reduced losses on derivative instruments.
- Debt Reduction: Total long-term debt decreased by approximately $130 million (from $347.9M to $217.5M) following the use of IPO proceeds to repay existing loan facilities.
- Expense Increases: General and administrative expenses rose significantly (361% in Q2, 517% in six months) due to IPO-related legal and auditing costs and incremental expenses associated with being a publicly traded entity.
- Derivative Losses: Realized and unrealized losses on derivative instruments dropped from $4.5 million in Q2 2012 to $0.4 million in Q2 2013. The Partnership did not transfer interest rate swap contracts to the new entity at the IPO closing.
Guidance, Outlook, and Risks
- Subsequent Acquisition: On August 1, 2013, the Partnership acquired the Carmen Knutsen from KNOT for a net purchase price of approximately $55.9 million (cash and seller financing). The vessel is under a 5-year charter with Repsol.
- Distributions: On August 14, 2013, the Partnership paid a quarterly cash distribution of $0.3173 per unit (prorated for the post-IPO period), totaling $5.6 million. This aligns with the target distribution of $0.375 per unit quarterly ($1.50 annualized).
- Liquidity: As of June 30, 2013, the Partnership held $25.2 million in cash and had access to a $20 million revolving credit facility. Management believes resources are sufficient for the next 12 months.
- Taxation: The Partnership entered the Norwegian tonnage tax regime in February 2013, incurring a one-time entrance tax of approximately $3 million (pre-funded via IPO proceeds).
- Risks: Key risks include concentration of credit (three customers account for substantially all revenues), interest rate fluctuations on variable-rate debt, and potential disruptions in the offshore oil and gas market. The Partnership currently has no outstanding interest rate swaps.
Investor Verification Checklist
- Restatement Impact: Verify the impact of the restatement of 2012 predecessor financial statements, which corrected IPO expense accounting and reduced 2012 net income from $4.2M to $0.7M.
- Debt Covenants: Confirm continued compliance with financial covenants (e.g., minimum book equity ratio of 30%, EBITDA to interest ratio of 2.50) across all amended loan facilities.
- Related Party Transactions: Review ongoing fees paid to KNOT and affiliates for technical management, administration, and financing services.
- Charter Expirations: Monitor the expiration dates of the time charters for Windsor Knutsen (2014) and Bodil Knutsen (2016) and the status of extension options.
- Acquisition Accounting: Review the final purchase price allocation for the Carmen Knutsen acquisition in the next interim report.