Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Period: Quarterly period ended September 30, 2013
Business Overview: The Partnership owns and operates a fleet of offshore shuttle tankers under long-term charters. As of September 30, 2013, the fleet consisted of five vessels: Windsor Knutsen, Bodil Knutsen, Recife Knutsen, Fortaleza Knutsen, and Carmen Knutsen. The Partnership completed its Initial Public Offering (IPO) on April 15, 2013, and acquired the Carmen Knutsen from its sponsor, KNOT, on August 1, 2013.
Key Financial Metrics
| Metric (in US$ thousands) | Three Months Ended Sep 30, 2013 |
Nine Months Ended Sep 30, 2013 |
Nine Months Ended Sep 30, 2012 |
|---|---|---|---|
| Total Revenues | 20,454 | 51,184 | 48,834 |
| Operating Income | 9,360 | 19,980 | 20,961 |
| Net Income (Loss) | 6,357 | 7,162 | (730) |
| Earnings Per Unit (Common) | $0.363 | $0.611 | — |
| Cash Flow from Operations | — | 26,921 | 11,007 |
| Cash and Cash Equivalents (End of Period) | 28,483 | 28,483 | 204 |
| Total Long-Term Debt | 356,989 | 356,989 | 347,850 |
Note: Earnings per unit for the nine months ended September 30, 2013, reflects the period from the IPO date (April 15, 2013) to September 30, 2013.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 24% in the three months ended September 30, 2013, compared to the same period in 2012. This was driven by the inclusion of the Carmen Knutsen (acquired August 1, 2013) and rate adjustments on existing vessels. Conversely, loss of hire insurance recoveries dropped to zero in Q3 2013 compared to $1.4 million in Q3 2012, as the Windsor Knutsen was fully operational.
- Profitability: Net income surged to $6.4 million in Q3 2013 from $0.2 million in Q3 2012. For the nine-month period, the Partnership reported a net income of $7.2 million, a significant turnaround from a net loss of $0.7 million in the prior year. This improvement is attributed to higher revenues, reduced interest expenses due to debt repayments from IPO proceeds, and lower derivative losses.
- Expense Fluctuations: Vessel operating expenses increased by 121% in Q3 2013 compared to Q3 2012, primarily due to the addition of the Carmen Knutsen and the absence of insurance reimbursements that reduced expenses in the prior year. General and administrative expenses decreased in Q3 2013 due to the absence of non-recurring IPO expenses recorded in Q3 2012.
- Derivative Instruments: Realized and unrealized losses on derivative instruments decreased significantly to $0.3 million in Q3 2013 from $2.1 million in Q3 2012. The Partnership entered into a new $50 million interest rate swap in September 2013 to hedge variable-rate debt.
Guidance, Outlook, and Risks
- Acquisition Strategy: The Partnership has an option to purchase four additional newbuild shuttle tankers from KNOT within 24 months of charter acceptance. The Carmen Knutsen acquisition was accounted for as a business acquisition, contributing $3.4 million in revenue and $1.1 million in net income since August 1, 2013.
- Liquidity and Capital Resources: As of September 30, 2013, the Partnership held $28.5 million in cash and cash equivalents. It maintains a $20 million revolving credit facility, of which $20 million was drawn to finance the Carmen Knutsen acquisition. Management believes current resources are sufficient to meet working capital requirements for at least the next 12 months.
- Distributions: On November 14, 2013, the Partnership paid a quarterly cash distribution of $0.435 per unit ($7.6 million total) for the quarter ended September 30, 2013.
- Key Risks:
- Market Risk: Exposure to interest rate fluctuations on variable-rate debt (approx. $278.5 million net exposure) and foreign currency exchange rates (USD vs. NOK).
- Credit Risk: Concentration of revenue among four major customers (BG Group, Statoil, Transpetro, Repsol).
- Regulatory/Operational: Compliance with environmental regulations and potential drydocking costs estimated at $8.7 million over 2016-2018.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants, specifically the minimum book equity ratio of 30% and minimum EBITDA to interest ratio of 2.50 across all vessel facilities.
- Charter Expirations: Review the expiration dates of long-term charters: Windsor Knutsen (2014), Bodil Knutsen (2016), Carmen Knutsen (2018), and bareboat charters for Recife and Fortaleza (2023).
- Related Party Transactions: Confirm the terms of the $10.5 million seller's loan from KNOT for the Carmen Knutsen acquisition and ongoing management fees paid to KNOT affiliates.
- Derivative Hedging: Assess the impact of the new $150 million in interest rate swaps entered into post-period (October/November 2013) on future interest expense.
- Tax Regime: Understand the implications of the Norwegian tonnage tax regime, including the one-time entrance tax of approximately $3.0 million recognized in 2013.