KNOT Offshore Partners LP annual report, Q4 FY2018

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KNOT Offshore Partners LP — 2018 Form 20-F Summary

Business context and reporting period

This is the audited annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. The Partnership owns and operates shuttle tankers under long-term charters; its 16-vessel fleet served seven customers in 2018. Financial statements are prepared under U.S. GAAP in U.S. dollars.

Financial and operating performance

  • Total revenue was $279.5 million, up 27.5% from $219.2 million in 2017. Time-charter and bareboat revenue increased 31% to $278.2 million.
  • Operating income was $128.7 million, up 34.9%; operating margin was approximately 46.0%, versus 43.5% in 2017. Net income was $82.2 million, up 20.7%; net margin was approximately 29.4%, versus 31.0%.
  • Basic and diluted earnings per common unit were $2.251 and $2.217, respectively, compared with $2.050 and $2.037 in 2017. Common-unit cash distributions remained $2.08 per unit for the year ($0.52 quarterly). Series A preferred distributions totaled $7.2 million.
  • Operating cash flow was $148.6 million, down from $154.6 million. Investing cash outflow was $15.5 million and financing cash outflow was $137.4 million. Cash declined to $41.7 million from $46.1 million.
  • At year-end, total assets were $1.837 billion and vessels, net, were $1.767 billion. Gross debt in the detailed debt schedule was $1.087 billion, including $106.9 million current debt; the filing’s selected-data section separately gives $1.077 billion, a difference investors should reconcile. Partners’ capital was $642.8 million.
  • Available liquidity was reported at $70.4 million: $41.7 million cash and $28.7 million undrawn revolving capacity. Net current liabilities were $76.0 million. Debt rates were generally LIBOR plus margins of 1.8%–2.4%; $555.5 million of debt was covered by interest-rate swaps, leaving approximately $490.1 million net floating-rate exposure. A 1 percentage-point rate move was estimated to change annual interest expense by about $4.9 million.
  • Gross debt repayments scheduled for 2019 were $109.5 million, including a $25 million balloon; aggregate balloon repayments were $688.4 million across the stated maturity schedule. Vessels secure the debt.

Material changes versus 2017

  • Growth mainly reflected the addition of the Anna Knutsen in March 2018 and the full-year contribution of vessels acquired in 2017. Management attributed $57.9 million of the year-over-year charter-revenue increase to these fleet additions and fuller operating periods.
  • Operating expenses rose: vessel operating expenses increased 21% to $56.7 million and depreciation increased 24% to $88.8 million. Interest expense rose 63% to $50.0 million, reflecting acquisition-related borrowings, refinancing and higher LIBOR.
  • Operating cash flow fell despite higher earnings, principally due to working-capital movements and $12.4 million of scheduled drydocking expenditures, compared with $6.9 million in 2017.
  • The Partnership refinanced several vessel loans in 2018, including a $320 million term loan and $55 million revolving facility, and refinanced the Torill Knutsen loan with a $100 million facility. The Anna Knutsen acquisition was accounted for as an asset acquisition.

Outlook, risks and unusual items

  • Management described the medium- to long-term shuttle-tanker outlook as positive, citing an aging fleet, projects under development and expected 2019 tendering activity. This is a qualitative view, not earnings or distribution guidance. Management said available resources should cover current working-capital needs for at least 12 months, assuming charter rates remain at current levels.
  • Estimated maintenance and replacement capital expenditures were $55.5 million annually ($47.0 million for vessel replacement and $8.5 million for drydockings and surveys). The Partnership also estimated $42.6 million of drydocking and classification survey spending for its 12 time-chartered vessels during 2019–2023.
  • Shell’s Windsor Knutsen charter was suspended for 10–12 months beginning March 4, 2019; the vessel was to operate under a KNOT-affiliate pool charter on the same terms during the suspension. The arrangement changes the contractual counterparty and should be monitored.
  • Charter revenue is concentrated: Shell represented 29% of 2018 revenue, Transpetro 17%, ENI 16%, Repsol 13%, Galp 11%, Equinor 8% and ExxonMobil 6%. All vessels were on long-term charters, but expirations, extensions, off-hire and customer credit remain important risks.
  • Broker valuations on a charter-free basis indicated aggregate vessel market value about $144 million below carrying value at year-end. Management identified no impairment indicators and recorded no impairment, relying on expected cash flows from existing and future charters.
  • Other material risks include substantial leverage and debt covenants, LIBOR transition, customer and industry concentration, vessel incidents and drydock costs, environmental regulation, currency exposure and dependence on KNOT for management services. The Partnership reported compliance with debt covenants at year-end. It reported no known legal matter expected to have a material adverse effect.
  • The Series A preferred units carry cumulative distributions at an 8% annual rate and rank ahead of common units; common distributions cannot be paid unless preferred distributions are paid or set aside. The preferred units are convertible under specified terms, creating potential dilution.

Investor facts to verify

  • Reconcile the $1.077 billion debt figure in selected financial data with the $1.087 billion detailed debt schedule and confirm the current debt and balloon repayment profile.
  • Assess liquidity and distribution coverage after scheduled principal payments, drydock spending, maintenance reserves and preferred distributions; the $70.4 million liquidity figure includes revolving availability.
  • Review charter maturities, customer extension decisions and the Windsor Knutsen suspension and affiliate-pool arrangement.
  • Examine the assumptions supporting vessel impairment tests, particularly the $144 million charter-free valuation shortfall and post-charter redeployment rates.
  • Evaluate customer concentration, floating-rate exposure and the potential dilution or cash requirements associated with Series A preferred-unit conversion or redemption.