Business Context and Reporting Period
Company: KNOT Offshore Partners LP (KNOP)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Business Overview: A Marshall Islands limited partnership owning and operating a fleet of shuttle tankers under long-term time and bareboat charters. The company completed its IPO on April 15, 2013. As of year-end, the fleet consisted of five shuttle tankers: Fortaleza Knutsen, Recife Knutsen, Bodil Knutsen, Windsor Knutsen, and Carmen Knutsen (acquired August 1, 2013). Major customers include Transpetro, Statoil, BG Group, and Repsol.
Key Financial Metrics (Year Ended Dec 31, 2013)
| Metric | 2013 (USD) | 2012 (USD) |
|---|---|---|
| Total Revenues | $73,401,000 | $65,653,000 |
| Operating Income | $29,984,000 | $26,638,000 |
| Net Income | $15,064,000 | $745,000 |
| EBITDA | $52,402,000 | $36,639,000 |
| Adjusted EBITDA | $53,752,000 | $47,819,000 |
| Operating Cash Flow | $44,160,000 | $19,307,000 |
| Total Assets | $660,173,000 | $511,811,000 |
| Total Debt (Long-term + Current) | $349,977,000 | $347,850,000 |
| Cash and Cash Equivalents | $28,836,000 | $1,287,000 |
| Partners' Capital | $281,927,000 | $97,194,000 (Owners' Equity) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.8% to $73.4 million, driven primarily by the acquisition of the Carmen Knutsen (contributing $8.4 million in revenue) and rate adjustments on existing charters.
- Profitability Surge: Net income jumped from $0.7 million in 2012 to $15.1 million in 2013. This was significantly aided by a reversal of derivative losses (gain of $0.5 million in 2013 vs. loss of $6.0 million in 2012) and reduced interest expense following the IPO.
- Debt Reduction: Interest expense decreased by 20.0% to $10.8 million due to debt repayments made with IPO proceeds and reduced related-party interest.
- Capital Structure: The company transitioned from a private entity to a public limited partnership in April 2013, issuing 8,567,500 common units and raising net proceeds of approximately $160.7 million.
- Acquisition: Acquired the Carmen Knutsen on August 1, 2013, for a net cash consideration of approximately $45.4 million plus a $10.5 million seller's credit loan.
Guidance, Outlook, and Risks
- Outlook: Management expects to grow the fleet through accretive acquisitions, specifically exercising options to purchase four additional newbuilds (Hilda Knutsen, Torill Knutsen, Ingrid Knutsen, Raquel Knutsen) from KNOT. The company aims to increase quarterly distributions per unit over time.
- Distributions: The board authorized a quarterly distribution of $0.435 per unit for Q4 2013 (paid Feb 2014), an increase from the $0.375 minimum quarterly distribution.
- Key Risks:
- Customer Concentration: Four customers (BG Group, Transpetro, Statoil, Repsol) accounted for approximately 100% of revenues in 2013.
- Charter Expirations: The Windsor Knutsen charter with BG Group expires in mid-2014; BG Group has indicated it will not exercise its extension option.
- Debt Covenants: Financing agreements contain strict covenants (e.g., minimum EBITDA to interest ratio of 2.50, minimum book equity ratio of 30%) that could restrict distributions if breached.
- Market Volatility: Exposure to fluctuations in oil prices, charter rates, and vessel values. The filing notes that the aggregate market value of vessels was approximately $42 million below carrying value as of Dec 31, 2013, though no impairment was recorded due to long-term fixed charters.
Investor Verification Checklist
- Charter Renewal: Verify the status of re-chartering negotiations for the Windsor Knutsen, which expires in 2014 and represents a significant portion of revenue.
- Acquisition Options: Confirm the timeline and pricing mechanisms for the four optional newbuild purchases from KNOT under the Omnibus Agreement.
- Debt Compliance: Review the latest quarterly reports to ensure continued compliance with the 2.50 EBITDA/Interest and 30% Book Equity covenants.
- Related Party Transactions: Scrutinize the fees paid to KNOT Management and KNOT UK under the Technical Management and Administrative Services agreements, which are substantial and payable regardless of profitability.
- Derivative Exposure: Monitor the fair value of interest rate swaps and foreign exchange contracts, which caused significant volatility in prior years' earnings.