KNOT Offshore Partners LP — FY2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not separately presented in the supplied text. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Business context and reporting period
The Partnership owns and operates shuttle tankers transporting offshore crude oil under time and bareboat charters. Its fleet grew from five vessels at year-end 2013 to eight at year-end 2014. All but the Windsor Knutsen were employed under long-term charters; the fleet’s average remaining charter term was 5.3 years, including guaranteed options.
Comparisons are affected by acquisitions: the Carmen Knutsen was acquired in August 2013; the Hilda Knutsen and Torill Knutsen in June 2014; and the Dan Cisne in December 2014. Pre-IPO historical figures include carve-out financial information and may not represent the costs or results of an independent public company.
Financial and operating performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $112.8 million | $73.4 million |
| Operating income | $50.3 million | $30.0 million |
| Net income | $27.4 million | $15.1 million |
| Basic and diluted earnings per common unit | $1.369 | $1.063 |
| Operating cash flow | $59.3 million | $44.2 million |
| Capital used in investing activities | $121.9 million | $55.5 million |
| Cash distributions declared and paid per unit during year | $1.795 | $0.752 |
Operating margin was approximately 44.6% and net margin approximately 24.3% in 2014, calculated from reported revenue and income. Management-defined, non-GAAP EBITDA was $77.0 million and Adjusted EBITDA was $84.6 million; the filing cautions these measures are not substitutes for GAAP results. Revenue increased 54%, primarily as acquired vessels contributed for more of the year. Vessel operating expenses rose 67% to $23.9 million and depreciation rose 44% to $34.3 million, also principally reflecting fleet growth. Interest expense increased 42% to $15.3 million.
Derivative instruments produced a $6.4 million realized and unrealized loss in 2014, versus a $0.5 million gain in 2013. The filing says unrealized fair-value changes do not affect cash flow. Cash distributions increased during the year; the distribution for Q4 2014 was $0.49 per unit and was paid in February 2015, totaling $11.5 million.
Balance sheet, debt and liquidity
At December 31, 2014, cash and cash equivalents were $30.7 million, total assets $1.071 billion, and total debt including current installments and seller’s credit $613.2 million, up from $350.0 million a year earlier. Partners’ capital was $419.4 million. Current assets of $35.7 million were below current liabilities of $60.0 million, a $24.3 million working-capital deficit. The $20 million revolving facility was fully drawn.
Debt generally bears interest at LIBOR plus margins of 2.125%–4.5%; maturities include substantial balloon payments, with $287.8 million scheduled for 2019. The Partnership had economically fixed rates on $382.3 million of debt through swaps; management estimated that a 1 percentage-point change in short-term rates would change annual interest expense by about $2.0 million. Management stated current resources were sufficient for working-capital needs for at least 12 months, while noting reliance on external financing for acquisitions and expansion.
Operating cash flow was $59.3 million; investing outflows were $121.9 million, mainly reflecting vessel acquisitions; financing inflows were $64.8 million, including equity proceeds and refinancing, partly offset by debt repayments and $36.6 million in distributions.
Material changes, outlook and risks
- The Partnership acquired three vessels in 2014. It raised $146.7 million net through a public offering and refinanced several vessel loans. The Dan Cisne acquisition included a $12 million seller’s credit from KNOT.
- The Windsor Knutsen’s prior BG Group charter ended in July 2014 after BG Group declined an extension. KNOT chartered the vessel through Q3 2015; a new two-year BG Group charter is scheduled to begin in Q4 2015, with three one-year extension options.
- Management described a temporary market overcapacity associated with delayed offshore project start-ups, while expecting the market to approach balance and tendering activity to continue in 2015. It viewed the medium- to long-term outlook as positive, but said sustained low oil prices could affect customers and future offshore activity. These are forward-looking statements, not assurances.
- Customer and revenue concentration is significant: in 2014 Transpetro, ENI, Statoil, Repsol, BG Group and KNOT accounted for approximately 23%, 21%, 20%, 18%, 11% and 7% of revenue, respectively. The filing also warns that falling oil prices could weaken customers’ finances and ability to pay.
- One borrower breached a positive-working-capital covenant at year-end because of a $2.7 million negative mark-to-market on foreign-exchange forwards. Lenders granted a waiver through March 31, 2015; the filing says the breach was corrected and the borrower was in compliance. Other debt covenants were reported as satisfied.
- Vessels with a carrying value of about $1.022 billion were pledged as collateral. Broker valuations excluding charters indicated aggregate market value about $86 million below carrying value; management recorded no impairment, citing expected cash flows under long-term charters.
- Estimated annual maintenance and replacement capital expenditures were $24.7 million, including $21.5 million for eventual vessel replacement. Management estimated about $14.5 million of drydocking and classification survey costs for the five time-charter vessels over 2015–2018.
- Related-party dependence and governance are notable: KNOT affiliates provide management and administrative services, KNOT owns the general partner and incentive distribution rights, and acquisitions from KNOT require scrutiny of pricing and conflicts. CEO/CFO Arild Vik announced his resignation effective July 30, 2015.
- The filing identifies operational, environmental, regulatory, insurance, currency, interest-rate, refinancing, charter-renewal and vessel-value risks. It reports no known legal proceeding expected to have a material adverse effect. Management judged disclosure controls and internal control over financial reporting effective at year-end; the auditor did not provide an ICFR attestation under the emerging-growth-company transition rules.
Most important facts for investors to verify
- Whether cash generation and covenant headroom support the $0.49 quarterly distribution, given the working-capital deficit, fully drawn revolver, debt service and maintenance needs.
- Debt amortization and balloon maturities, refinancing access, and the status of all covenant tests and waivers after year-end.
- Charter coverage, renewal options and counterparties’ credit quality, particularly for the Windsor Knutsen and concentrated customers exposed to lower oil prices.
- Acquisition economics and related-party terms, including seller financing, management charges and the Partnership’s remaining vessel purchase options from KNOT.
- Assumptions supporting vessel impairment conclusions, derivative fair values and the reported $86 million charter-free market-value shortfall.
- Actual drydocking, replacement-capital and environmental compliance costs versus estimates, and the implications of management’s announced CEO/CFO departure.