Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and six months ended June 30, 2014
Business Overview: The Partnership owns and operates a fleet of offshore shuttle tankers under long-term charters. As of June 30, 2014, the fleet consisted of seven vessels. The Partnership is 40% owned by Knutsen NYK Offshore Tankers AS ("KNOT").
Key Financial Metrics (Six Months Ended June 30, 2014)
| Metric | Value (US$ Thousands) |
|---|---|
| Total Revenues | 43,893 |
| Operating Income | 18,906 |
| Net Income | 8,921 |
| Net Income (Limited Partners) | 8,744 |
| Earnings Per Unit (Common) | $0.505 |
| Operating Cash Flow | 25,340 |
| Total Debt (Long-term + Current) | 545,774 |
| Cash and Cash Equivalents | 34,451 |
| Restricted Cash | 691 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 43% to $43.9 million (from $30.7 million in 2013), driven primarily by the inclusion of the Carmen Knutsen (acquired August 2013) and the Hilda Knutsen and Torill Knutsen (acquired June 2014).
- Profitability: Net income surged 1,008% to $8.9 million (from $0.8 million in 2013). The prior year was significantly impacted by a one-time $3.0 million entrance tax into the Norwegian tonnage tax regime.
- Derivative Losses: Realized and unrealized losses on derivative instruments increased significantly to $2.3 million (from $0.1 million in 2013) due to a decrease in long-term swap rates and an increased notional amount of swaps ($350 million).
- Debt Refinancing: In June 2014, the Partnership entered into new senior secured credit facilities totaling $380 million to refinance existing debt, including a $240 million facility drawn to repay loans secured by the Windsor, Bodil, and Carmen Knutsen.
- Acquisitions: Completed the acquisition of the Hilda Knutsen and Torill Knutsen on June 30, 2014, for a net cash consideration of approximately $114.3 million.
Guidance, Outlook, and Risks
- Charter Status: The Windsor Knutsen was re-delivered in July 2014 after BG Group declined an extension. A new two-year time charter with BG Group commencing in October 2015 has been secured. The vessel will be employed under a time charter with KNOT in the interim.
- Capital Allocation: The Partnership paid a quarterly cash distribution of $0.435 per unit ($9.9 million total) on August 14, 2014. Net proceeds from a June 2014 equity offering ($128.8 million) were used to fund vessel acquisitions.
- Liquidity: Current liabilities exceeded current assets by $20.2 million as of June 30, 2014, largely due to mark-to-market valuations of derivative liabilities ($3.7 million). Management believes current resources are sufficient for the next 12 months.
- Risks: Key risks include fluctuations in interest rates (hedged via swaps), foreign currency exchange rates, concentration of credit risk (four customers account for substantially all revenues), and the ability to secure long-term charters for vessels upon expiration.
Investor Verification Checklist
- Acquisition Integration: Verify the operational integration and revenue contribution of the newly acquired Hilda Knutsen and Torill Knutsen.
- Derivative Exposure: Review the impact of interest rate swap mark-to-market losses on net income and cash flow, noting the $350 million notional exposure.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the minimum EBITDA to interest ratio of 2.50 and minimum book equity ratio of 30%.
- Charter Renewals: Monitor the status of the Windsor Knutsen interim charter and the commencement of the new BG Group charter in Q4 2015.
- Related Party Transactions: Review ongoing fees paid to KNOT and affiliates for technical management, administration, and financing services.