KNOT Offshore Partners LP — 2016 Annual Report Summary
Business context and reporting period. This Form 20-F covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. KNOT owns and operates shuttle tankers on long-term charters. At year-end its fleet comprised 11 vessels; it acquired the Raquel Knutsen in December. The filing reports a 12-vessel fleet as of March 2017 after the subsequent Tordis Knutsen acquisition. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $173.7 million | $155.0 million |
| Operating income | $82.2 million | $68.1 million |
| Net income | $61.1 million | $40.4 million |
| Operating cash flow | $108.4 million | $89.2 million |
| Investing cash flow | $(14.0) million | $(46.5) million |
| Financing cash flow | $(90.3) million | $(49.6) million |
| Cash at year-end | $27.7 million | $23.6 million |
| Adjusted EBITDA | $138.4 million | $123.2 million |
| Cash distributions per unit declared and paid during year | $2.08 | $2.03 |
- Revenue rose 12%, while net income increased 51%. Management attributed revenue growth mainly to vessels added through acquisitions, including the Raquel Knutsen, Ingrid Knutsen and Dan Sabia. Higher interest and depreciation costs partly offset the increased earnings.
- Operating income margin was approximately 47% of revenue; net income margin was approximately 35%.
- At December 31, total debt was reported as $745.6 million before unamortized debt issuance costs, including $25.0 million of seller financing. The balance sheet shows $58.984 million of current debt and $657.662 million of long-term debt, plus $25.0 million due to related parties. Scheduled debt principal repayments were $60.3 million in 2017, with substantial maturities in 2018 and 2019.
- Year-end working capital was negative: net current liabilities were $46.6 million. The filing cites $27.7 million cash and $10 million undrawn under one revolving facility, but elsewhere refers to $30 million of undrawn revolving credit availability; see verification items below.
- Interest expense increased to $20.9 million from $17.5 million. Derivatives produced a $1.2 million gain in 2016 versus a $9.7 million loss in 2015; these mark-to-market changes are not cash flows in themselves.
Material changes and notable items
- The Partnership acquired the Raquel Knutsen on December 1, 2016. The vessel contributed only one month of 2016 results. Its acquisition included $25 million of seller credit and seller loan, both repaid in January 2017.
- All subordinated units converted one-for-one into common units on May 18, 2016. Common units outstanding at year-end were 27,194,094.
- Statoil extended the Bodil Knutsen charter by two years, through May 2019, and received five additional one-year extension options.
- The 2015 $6.2 million goodwill impairment did not recur in 2016. No vessel impairment was recorded, although management estimated charter-free market values of the fleet were approximately $152 million below their carrying value; management considered the vessel carrying values recoverable based on expected charter cash flows.
- After year-end, the Partnership raised approximately $54.9 million net from a January 2017 common-unit offering and approximately $48.5 million net from issuing 2,083,333 Series A preferred units in February. The preferred units carry cumulative distributions at 8% annually, rank senior to common units for distributions and liquidation, and may convert into common units under specified conditions.
- In March 2017, the Partnership acquired the Tordis Knutsen. This was a subsequent event, not part of the 2016 year-end fleet or results.
Outlook, risks and management commentary
- Management stated that available resources, operating cash and financing were expected to cover working-capital needs for at least 12 months, assuming current charter rates. It also reported compliance with debt covenants at December 31, 2016. These are forward-looking assessments, not guarantees.
- The Partnership aims to grow distributions through accretive vessel acquisitions and long-term charters. Management described the shuttle tanker market as approaching balance after delayed offshore projects, with increased activity for unchartered vessels and expected tendering activity in 2017. It noted that lower oil prices could delay or cancel offshore projects and weaken future charter demand.
- Revenue is concentrated among six customers: ENI (27%), Transpetro (26%), Statoil (13%), Repsol (12%), Shell (12%) and ExxonMobil (10%) in 2016. The filing highlights uncertainty around Petrobras/Transpetro, including Petrobras’ financial and project outlook.
- Distributions are not assured. Common-unit distributions are subordinate to accrued preferred-unit distributions, debt payments, lender restrictions, board-established reserves and maintenance needs. The reported $0.52-per-unit distribution for the quarter ended December 31, 2016 was paid in February 2017.
- Interest-rate exposure remains material: $446.7 million of debt was economically hedged at year-end, leaving approximately $271.3 million net exposure after cash; a 1 percentage-point short-term rate move was estimated to change annual interest expense by about $2.7 million. Vessel mortgages secure substantial borrowings, and covenant breaches could restrict distributions or trigger acceleration.
- Other significant risks include charter expiration or termination, vessel downtime and drydocking, vessel-value declines, customer credit, foreign-exchange movements, environmental and ballast-water compliance costs, and dependence on KNOT affiliates for management and administrative services. The filing estimated ballast-water treatment costs of $1.0–$1.4 million per vessel for certain vessels not yet fitted.
- A February 2017 controllable-pitch-propeller failure on the Raquel Knutsen was expected to cause 50–60 days off-hire. The Partnership estimated its aggregate cost at approximately $0.9 million after insurance, subject to a 14-day loss-of-hire deductible and a $150,000 repair deductible.
Most important facts for investors to verify
- Reconcile year-end liquidity disclosures: $10 million undrawn in the stated $35 million revolving facility versus the separate statement that $30 million was undrawn.
- Confirm debt presentation and near-term refinancing or repayment plans, particularly the 2018–2019 maturities and the effect of the 2017 equity raises and Tordis acquisition.
- Assess distribution coverage after preferred-unit distributions, scheduled debt service, drydocking and replacement-capital needs; the filing gives annual estimated maintenance and replacement capital expenditures of $35.4 million.
- Track charter renewals and customer credit exposure, especially the high combined concentration in ENI and Transpetro and the charter status of vessels with nearer-term expirations.
- Review the preferred units’ cumulative 8% priority, conversion and redemption provisions, and potential dilution to common unitholders.