KNOT Offshore Partners LP — 2017 Form 20-F Summary
Business context and reporting period
This is the Partnership’s annual report for the fiscal year ended December 31, 2017, not a standalone fourth-quarter report. KNOT owns and operates shuttle tankers under long-term time and bareboat charters. Its year-end fleet was 15 vessels; the Anna Knutsen acquisition in March 2018 brought the fleet to 16. Results are prepared under U.S. GAAP and reported in U.S. dollars.
Key financial metrics
Amounts below are in millions of U.S. dollars unless stated otherwise.
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $219.2 | $173.7 |
| Time and bareboat charter revenue | $212.5 | $172.9 |
| Operating income | $95.4 | $82.2 |
| Net income | $68.1 | $61.1 |
| Common-unit basic earnings per unit | $2.050 | $2.291 |
| EBITDA / Adjusted EBITDA | $170.1 / $166.9 | $138.2 / $138.4 |
| Operating cash flow | $154.6 | $108.4 |
| Investing cash flow | $(94.9) | $(14.0) |
| Financing cash flow | $(41.4) | $(90.3) |
| Cash and cash equivalents at year-end | $46.1 | $27.7 |
Operating margin was approximately 43.5% versus 47.3% in 2016; net margin was approximately 31.1% versus 35.2%. Cash distributions declared and paid were $2.08 per common unit, unchanged from 2016. The quarterly common-unit distribution was $0.52 for the quarter ended December 31, 2017. Series A preferred distributions are cumulative and senior to common distributions; $3.5 million was paid to preferred holders during 2017.
At December 31, 2017, gross long-term debt was approximately $1,033.3 million, including $93.0 million presented as current debt on the balance sheet. Total assets were $1,793.2 million and partners’ capital was $640.0 million; Series A preferred units were recorded separately at $89.3 million. Current assets of $56.1 million were below current liabilities of $122.8 million, producing net current liabilities of $66.7 million. Reported available liquidity was $81.1 million at year-end, comprising $46.1 million cash and $35.0 million of revolving-credit availability; by April 25, 2018, aggregate undrawn revolver capacity was $13.0 million.
Material changes versus 2016
- Total revenue rose 26%, charter revenue rose 23%, and net income increased 11%. Growth principally reflected the addition of the Tordis, Vigdis, Lena and Brasil Knutsen, as well as the Raquel Knutsen contributing for a full year.
- Operating cash flow increased by $46.1 million. Investing outflows rose to $94.9 million, mainly reflecting the 2017 vessel acquisitions.
- Vessel operating expenses increased 51% to $46.7 million, depreciation increased 27% to $71.6 million, and interest expense increased 47% to $30.7 million, reflecting fleet growth, vessel incidents and higher debt and LIBOR.
- Common-unit basic earnings per unit fell to $2.050 from $2.291 despite higher net income. The filing reports common-unit offerings and issuance of preferred units during 2017; the preferred units’ share of 2017 net income was $5.3 million.
- Reported derivative gains increased to $4.8 million from $1.2 million, including $7.4 million of unrealized, non-cash gains in 2017. These gains affect reported earnings but not operating cash flow.
Outlook, commentary, risks and unusual items
- Management cited a positive medium- to long-term shuttle-tanker outlook, with industry activity and tendering expected to improve in 2018. This is not a quantified earnings or distribution forecast. Existing long-term fixed-rate charters support contracted cash flows; minimum future charter revenues disclosed at year-end were $1,017.1 million, subject to assumptions and not reduced for estimated off-hire.
- Management stated that resources, including $13.0 million of undrawn revolver capacity as of April 25, 2018, were expected to cover working-capital needs and ongoing obligations for at least 12 months, assuming current charter rates. This assessment coexists with year-end net current liabilities of $66.7 million and substantial debt maturities and balloon payments.
- The Partnership’s annual estimated maintenance and replacement capital expenditure deduction was $50.1 million. It estimated approximately $29 million of drydocking and classification-survey costs for its 12 time-chartered vessels from 2018 through 2022.
- The 3,750,000 Series A preferred units carry an 8% cumulative annual distribution on a $24 issue price and priority over common-unit distributions. They may generally convert into common units beginning February 2019, creating potential dilution; common distributions cannot be paid unless preferred distributions are paid or set aside.
- Four vessel acquisitions from KNOT were completed in 2017. Related-party transactions and reliance on KNOT affiliates for vessel management and administrative services are material features of the business. The acquisitions were reviewed by the conflicts committee, but terms were not the result of arm’s-length negotiations.
- Customer concentration is significant: Shell, ENI and Transpetro accounted for approximately 24%, 22% and 21% of 2017 revenue, respectively. Petrobras-related financial and operating risks, oil-price-driven customer spending, charter renewals, off-hire, drydocking, vessel values and access to financing are key exposures.
- Broker valuations on a charter-free basis placed aggregate vessel market value approximately $168 million below carrying value at year-end. Management identified no impairment indicators because it expected undiscounted cash flows under existing and future charters to exceed carrying values; no vessel impairment was recorded.
- Unusual operating items included $5.2 million of loss-of-hire insurance recoveries, mainly relating to propeller problems on the Raquel and Carmen Knutsen. The Carmen repair claim’s probable insurance recovery was not yet clear. The Partnership also recorded a $0.4 million probable charter-performance claim accrual.
- Debt is largely floating-rate and secured by vessels. After swaps and other offsets, management estimated $294.7 million of net exposure to floating rates; a one-percentage-point interest-rate change would change annual interest expense by approximately $2.9 million. The Partnership reported compliance with debt covenants at year-end.
- Environmental rules, including ballast-water treatment requirements, may require material spending; estimated treatment-system costs were $1.0–$1.4 million for each of seven named vessels. The filing also identifies uncertainty regarding U.S. PFIC tax classification and the effects of U.S. tax reform enacted in December 2017.
Important facts for investors to verify
- Reconcile 2017 reported revenue and earnings growth with the timing of acquisitions, insurance recoveries and non-cash derivative gains; assess underlying per-unit performance after equity issuance.
- Review near-term debt repayments, balloon maturities, refinancing terms and covenant headroom against current liquidity, including the reduction in undrawn revolver capacity after year-end.
- Assess the sustainability and coverage of common distributions after preferred-unit priority, maintenance reserves, debt service and planned drydocking expenditure.
- Check charter expirations, customer extension decisions and revenue exposure to Shell, ENI and Transpetro; confirm the status and expected recoveries of outstanding insurance claims.
- Evaluate the vessel-value shortfall, impairment assumptions, ballast-water compliance costs and the potential conversion or redemption dilution associated with Series A preferred units.