KNOT Offshore Partners LP — 2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; the supplied filing does not provide a complete Q4 income statement or cash-flow breakdown. Financial statements are prepared under U.S. GAAP and audited by Ernst & Young AS.
Business context
The Partnership owns and operates shuttle tankers under long-term charters. Its fleet grew to 10 vessels during 2015 through acquisitions of the Dan Sabia and Ingrid Knutsen, both from related party KNOT. At year-end, the fleet had six time-chartered and four bareboat-chartered vessels, with an average remaining charter term of 5.6 years, including guaranteed options. All vessels were on long-term charters.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $155.0 million | $112.8 million |
| Operating income | $68.1 million | $50.3 million |
| Net income | $40.4 million | $27.4 million |
| Net income per common unit | $1.499 | $1.369 |
| Operating cash flow | $89.2 million | $59.3 million |
| Adjusted EBITDA (non-GAAP) | $117.0 million | $84.6 million |
| Cash and cash equivalents, year-end | $23.6 million | $30.7 million |
| Total debt, including current portion | $671.7 million | $613.2 million |
| Total assets, year-end | $1,223.9 million | $1,070.7 million |
Revenue increased 37% and net income increased 48%, mainly because acquisitions contributed more vessel operating months; these increases should not be read as solely organic growth. Vessel operating expenses rose 15% to $27.5 million and depreciation rose 42% to $48.8 million, largely reflecting fleet expansion. Operating margin was approximately 44% in 2015 versus 45% in 2014; net margin was approximately 26% versus 24%.
Investing cash outflow was $46.5 million, principally for the Dan Sabia and Ingrid Knutsen acquisitions. Financing cash outflow was $49.6 million, including $53.4 million of distributions and debt repayments, partly offset by $116.6 million of net proceeds from a 5.0-million-unit offering. Current liabilities exceeded current assets by $39.3 million. The Partnership reported $20.0 million of undrawn revolving credit availability and said available resources were sufficient for current working-capital needs for at least 12 months.
Annual cash distributions declared and paid were $2.03 per unit in 2015, compared with $1.795 in 2014. The $0.52-per-unit distribution for Q4 2015 was paid on February 15, 2016, totaling $15.0 million. The filing cautions that distributions depend on available cash, reserves, debt covenants and board decisions.
Material changes and unusual items
- Fleet growth: acquired the Dan Sabia in June and the Ingrid Knutsen in October 2015. The June offering funded the Dan Sabia purchase and debt repayment; the Ingrid acquisition’s cash portion was funded from cash on hand.
- Debt increased by $58.5 million year over year to $671.7 million. The Partnership repaid its $12.0 million KNOT seller’s credit and ended the year with its $20.0 million revolving facility undrawn.
- A $6.2 million non-cash goodwill impairment was recorded after a decline in the unit price prompted an interim review. Vessel impairment was not recorded, although broker valuations indicated aggregate charter-free vessel market value was approximately $125 million below carrying value; management considered charter-supported cash flows recoverable.
- Realized and unrealized derivative losses increased to $9.7 million from $6.4 million. The Partnership did not apply hedge accounting, so fair-value changes affected reported earnings. At year-end, $410.0 million of debt was economically fixed through swaps; the filing estimated that a 1% interest-rate change would alter annual interest expense by approximately $2.4 million.
- Common units outstanding increased through the 5.0-million-unit offering, while the Partnership repurchased 180,906 units at an average $12.71 per unit. KNOT also purchased 90,368 units under the concurrent repurchase program.
Outlook, risks and contingencies
Management described the medium- to long-term shuttle-tanker outlook as positive and expected tendering activity in 2016. It cited delayed offshore project start-ups and temporary overcapacity, but said the market was approaching balance. Management noted that existing offshore projects could support demand over the next two to three years; longer-term growth depends on oil prices and offshore investment. No quantified earnings, cash-flow or distribution guidance is provided.
- Customer concentration is substantial: ENI generated 30% of 2015 revenue, Transpetro 26%, Statoil 15%, Repsol 13%, and KNOT 11%. The filing discusses uncertainty around Petrobras/Transpetro arising from the corruption scandal and spending reductions, as well as the potential effects of low oil prices on customers’ ability to pay.
- Debt is secured by vessels and subject to minimum-liquidity, positive-working-capital, equity-ratio, interest-coverage and collateral-value tests. The Partnership reported compliance with all debt covenants at December 31, 2015; a default could restrict distributions or accelerate repayment.
- Revenue and distributable cash remain exposed to charter termination or renewal terms, off-hire and drydocking, vessel operating costs, interest and currency movements, customer credit, oil-market conditions, regulation, and vessel values. Estimated annual maintenance and replacement capital expenditures were $30.3 million.
- Related-party dependencies include KNOT-provided management and administrative services, KNOT’s ownership and governance influence, and acquisitions from KNOT. The filing states that acquisitions were approved by the conflicts committee, which retained a financial adviser.
- Management reported no known legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective; the report contains no auditor attestation on internal controls under the emerging-growth-company exemption.
Important facts for investors to verify
- Whether reported revenue and cash-flow growth persists after separating acquisition contributions from comparable-fleet performance.
- Charterer credit quality, especially exposure to ENI and Transpetro, and charter terms or options approaching expiration.
- Liquidity and headroom under each facility’s covenants, including scheduled debt repayments and refinancing or balloon-payment needs.
- Whether distributions are supported by recurring operating cash after debt service, maintenance reserves and other capital needs; reported net income does not equal distributable cash.
- Assumptions supporting vessel recoverability despite the disclosed charter-free market-value shortfall, and the effects of lower oil prices or weaker charter markets.
- Related-party purchase pricing, service fees and governance safeguards, alongside the Partnership’s acquisition pipeline and any future unit issuance or repurchases.