Knot Offshore Partners quartrely net income $11.4 mln

shuttle tanker KNOT

For the three months ended March 31, 2017, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

  • Generated total revenues of $45.0 million, operating income of $17.5 million and net income of $11.4 million.
  • Generated Adjusted EBITDA of $33.2 million.1
  • Generated distributable cash flow of $15.6 million1
  • Fleet operated with 98.6% utilization2 for scheduled operations and 93.2% utilization taking into account the scheduled drydocking of the Windsor Knutsen, which was completed within 54.1 days.

1 EBITDA, Adjusted EBITDA and distributable cash flow are non-GAAP financial measures used by management and external users of our financial statements. Please see Appendix A for definitions of EBITDA, Adjusted EBITDA and distributable cash flow and a reconciliation to net income, the most directly comparable GAAP financial measure.

2 Utilization rate takes into account 14 deductible days of offhire for the Raquel Knutsen.

Other events:

  • On January 10, 2017, the Partnership sold 2,500,000 common units in a public offering, raising total net proceeds of $54.9 million.
  • On February 2, 2017, the Partnership issued and sold in a private placement 2,083,333 Series A Convertible Preferred Units (“Series A Preferred Units”) at a price of $24.00 per unit.
  • On May 16, 2017, the Partnership entered into an agreement to issue and sell an additional 1,666,667 Series A Preferred Units at a price of $24.00 per unit in a private placement which is expected to close by June 30, 2017, subject to customary closing conditions.
  • On March 1, 2017, the Partnership completed the acquisition of the entity that owns the Tordis Knutsen.
  • On March 31, 2017, the Partnership entered into a $100 million loan agreement to refinance the credit facility secured by the Hilda Knutsen.
  • On May 15, 2017, the Partnership paid a cash distribution of $0.52 per common unit and a $0.3093 per Series A Preferred Unit with respect to the quarter ended March 31, 2017.
  • On May 16, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, entered into a share purchase agreement with Knutsen NYK Offshore Tankers AS (“Knutsen NYK”) to acquire KNOT Shuttle Tankers 25 AS (“KNOT 25”), the company that owns the shuttle tanker, Vigdis Knutsen, from Knutsen NYK (the “Acquisition”). The Partnership expects the Acquisition to close by June 1, 2017, subject to customary closing conditions.

Financial Results Overview

Total revenues were $45.0 million for the three months ended March 31, 2017 (the “first quarter”) compared to $45.0 million for the three months ended December 31, 2016 (the “fourth quarter”). The first quarter revenues were positively affected by the time charter earnings of the Raquel Knutsen and the Tordis Knutsen being included in the results of operations from December 1, 2016 and March 1, 2017, respectively. The increase was offset by reduced revenues from the Windsor Knutsen as a result of its scheduled drydocking during the first quarter. Due to a technical fault with its controllable pitch propeller, the Raquel Knutsen went offhire during the first quarter, which resulted in a loss of hire insurance claim. The 14-day deductible for offhire under the related insurance policy also adversely affected revenues during the first quarter.

Vessel operating expenses for the first quarter of 2017 were $10.3 million, an increase of $2.6 million from $7.7 million in the fourth quarter of 2016. The increase was mainly due to the Raquel Knutsen and the Tordis Knutsen being included in the fleet commencing December 1, 2016 and March 1, 2017, respectively. In the vessel operating expenses for the first quarter, $0.6 million is related to bunkers consumption in connection with the drydocking of the Windsor Knutsen and $0.6 million is related to the cost of repair of Raquel Knutsen which is expected to be covered by insurance less a deductible of $150,000.

General and administrative expenses increased $0.3 million from $1.2 million in the fourth quarter of 2016 to $1.5 million in the first quarter of 2017. The increase primarily reflects the effect of additional activity in connection with the year-end accounts.

As a result, operating income for the first quarter of 2017 was $17.5 million compared to $21.6 million in the fourth quarter of 2016.

Interest expense for the first quarter of 2017 was $6.2 million, compared to $5.7 million for the fourth quarter of 2016. The increase was mainly due to the additional debt incurred in connection with the acquisition of the Raquel Knutsen and the Tordis Knutsen.

Realized and unrealized gain on derivative instruments was $0.5 million in the first quarter of 2017, compared to $4.0 million in the fourth quarter of 2016. The unrealized non-cash element of the mark-to-market gain was $1.3 million for the three months ended March 31, 2017 and $4.5 million for the three months ended December 31, 2016. Of the unrealized gain for the first quarter of 2017, $1.1 million related to mark-to-market gains on interest rate swaps due to an increase in swap rate during the quarter, and an unrealized gain of $0.2 million related to foreign exchange contracts due to a slightly stronger U.S. Dollar against the Norwegian Kroner (NOK). Of the unrealized gain for the fourth quarter of 2016, $7.4 million related to mark-to-market gains on interest rate swaps due to an increase in swap rate during the quarter, and an unrealized loss of $2.9 million related to foreign exchange contracts due to the strengthening of the U.S. Dollar against the NOK.

As a result, net income for the three months ended March 31, 2017 was $11.4 million compared to $19.5 million for the three months ended December 31, 2016.

Net income for the three months ended March 31, 2017 increased by $0.8 million compared to net income for the three months ended March 31, 2016. The operating income for the first quarter of 2017, decreased by $1.7 million compared to the first quarter of 2016, mainly due to reduced revenues from the Windsor Knutsen as a result of its drydocking during the first quarter of 2017. The decrease was partially offset by increased earnings from the Raquel Knutsen and Tordis Knutsen being included in the Partnership’s results of operations from December 1, 2016 and March 1, 2017, respectively, and a full quarter of earnings from the Bodil Knutsen in first quarter of 2017 compared to 20.9 days of offhire due to a planned drydocking in the first quarter of 2016. Total finance expense for the three months ended March 31, 2017 decreased by $2.5 million compared to the first quarter of 2016, mainly due to changes in unrealized gain and loss on derivative instruments. This was partially offset by increased interest expense due to additional debt due to the acquisitions of the Raquel Knutsen and Tordis Knutsen.

Distributable cash flow was $15.6 million for the first quarter of 2017, compared to $20.8 million for the fourth quarter of 2016. The decrease in distributable cash flow is mainly due to the scheduled drydocking of the Windsor Knutsen and the offhire for the vessel the Raquel Knutsen. The distribution declared for the first quarter of 2017 was $0.52 per common unit, equivalent to an annualized distribution of $2.08.

Operational review

On February 22, 2017, the Raquel Knutsen developed a technical default with its controllable pitch propeller and went offhire. As a result, the vessel went to Europe to drydock for repair. The Raquel Knutsen went back on charter on May 5, 2017. Total offhire was 71.3 days, but under its loss of hire insurance policies, the Partnership’s insurer will pay the hire rate agreed in respect of the Raquel Knutsen for each day in excess of 14 deductible days while the vessel was offhire. All of our vessels under time charter have such loss of hire insurance to mitigate the loss of revenues as well as hull & machinery insurance to cover repair costs, if any. Our four vessels under bareboat charter are insured by each charterer at its cost and carry no offhire risk as there are no offhire provisions in these contracts.

During the first quarter of 2017, the Windsor Knutsen completed her 10-year special survey drydocking at Brest shipyard in France on time and on budget. The Windsor Knutsen began receiving charterhire under her charter with Shell in Brazil on April 3, 2017 but will receive charter hire for approximately 3 additional days for vessel testing.

The Partnership’s vessels operated throughout the first quarter of 2017 with 98.6% utilization for scheduled operations taking into account the 14 deductible days of offhire for the Raquel Knutsen and 93.2% utilization when taking into account the scheduled drydocking of the Windsor Knutsen.

Financing and Liquidity

As of March 31, 2017, the Partnership had $64.9 million in available liquidity which consisted of cash and cash equivalents of $34.9 million and $30 million of capacity under its $35 million revolving credit facility. The revolving credit facility is available until June 10, 2019. The Partnership’s total interest bearing debt outstanding as of March 31, 2017 was $785.6 million ($781.2 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the quarter ended March 31, 2017 was approximately 2.2% over LIBOR.

As of March 31, 2017, the Partnership had entered into foreign exchange forward contracts, selling a total notional amount of $35.0 million against the NOK at an average exchange rate of NOK 8.30 per 1.0 U.S. Dollar. These foreign exchange forward contracts are economic hedges for certain vessel operating expenses and general expenses in NOK.

As of March 31, 2017, the Partnership had entered into various interest rate swap agreements for a total notional amount of $516.0 million to hedge against the interest rate risks of its variable rate borrowings. As of March 31, 2017, the Partnership receives interest based on three or six month LIBOR and pays a weighted average interest rate of 1.59% under its interest rate swap agreements, which have an average maturity of approximately 3.8 years. The Partnership does not apply hedge accounting for derivative instruments, and its financial results are impacted by changes in the market value of such financial instruments.

As of March 31, 2017, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $222.3 million based on total interest bearing debt outstanding of $785.6 million, less interest rate swaps of $516.0 million, less a 3.85% fixed rate export credit loan of $47.3 million and less cash and cash equivalents of $34.9 million. The Partnership’s outstanding interest bearing debt of $785.6 million as of March 31, 2017 is repayable as follows:3

Annual
repayment
Balloon
repayment
(US $ in thousands)
Remainder of 2017 $ 49,222 $
2018 58,784 154,927
2019 38,872 242,678
2020 27,940
2021 28,540 70,811
2022 and thereafter 70,396 43,440
Total $ 273,752 $ 511,856

3 The repayment schedule includes payments made under the existing credit facility secured by the Hilda Knutsen, which has a balloon payment of $68.3 million due in 2018. The Partnership expects this facility to be refinanced in by the end of May 2017, with an anticipated new balloon payment of $58.5 million due in 2024.

Common Unit Offering

On January 10, 2017, the Partnership sold 2,500,000 common units in a public offering, raising approximately $54.9 million in net proceeds.

Series A Convertible Preferred Units

On February 2, 2017, the Partnership issued and sold in a private placement 2,083,333 Series A Preferred Units at a price of $24.00 per unit (the “Issue Price”). After deducting estimated fees and expenses, the net proceeds from the sale were approximately $48.6 million. The Series A Preferred Units represent limited partner interests in the Partnership, are perpetual and will pay cumulative, quarterly distributions in arrears at an annual rate of 8.0% of the Issue Price, on or prior to the date of payment of distributions on the Partnership’s common units. The Series A Preferred Units will be convertible, under certain circumstances, at the then applicable conversion rate, which will be subject to adjustment under certain circumstances. On May 16, 2017, the Partnership agreed to issue and sell in a second private placement 1,666,667 additional Series A Preferred Units at a price of $24.00 per unit. The second private placement is expected to close on June 30, 2017, subject to customary closing conditions. In connection with the second private placement, the Partnership and the holders of the existing Series A Preferred Units agreed to certain amendments to the terms of the Series A Preferred Units which will be set forth in an amended and restated agreement of limited partnership to be entered into on the closing date.

Acquisition of Tordis Knutsen

On March 1, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired 100% of the shares of KNOT Shuttle Tankers 24 AS (“KNOT 24”), the company that owns the shuttle tanker, Tordis Knutsen, from Knutsen NYK. The purchase price of the acquisition was $147.0 million, less approximately $137.7 million of outstanding indebtedness related to the Tordis Knutsen plus approximately $21.1 million for a receivable owed by Knutsen NYK to KNOT 24 (the “KNOT 24 Receivable”) plus other purchase price adjustments of $2.5 million. On the closing of the Tordis Knutsen acquisition, KNOT 24 repaid approximately $42.8 million of the indebtedness, leaving an aggregate of approximately $94.9 million of debt outstanding under the secured credit facility related to the vessel (the “Tordis Facility”). The Tordis Facility is repayable in quarterly installments with a final balloon payment of $70.8 million due at maturity in November 2021. The Tordis Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.9%. On the closing of the acquisition, Knutsen NYK repaid the KNOT 24 Receivable. The purchase price was settled with cash on hand.

The Tordis Knutsen was delivered in November 2016 and is operating in Brazil under a five-year time charter with a subsidiary of Royal Dutch Shell plc, which will expire in the first quarter of 2022. The charterer has options to extend the charter for two five-year periods.

The Partnership’s board of directors (the “Board”) and the conflicts committee of the Board (the “Conflicts Committee”) approved the purchase price of the Tordis Knutsen acquisition. The Conflicts Committee retained an outside financial advisor to assist with its evaluation of the acquisition.

Acquisition of Vigdis Knutsen

On May 16, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, entered into a share purchase agreement to acquire KNOT 25, the company that owns the shuttle tanker, Vigdis Knutsen, from Knutsen NYK. The Partnership expects the Acquisition to close by June 1, 2017, subject to customary closing conditions. The purchase price of the Acquisition is $147.0 million, less approximately $137.7 million of outstanding indebtedness related to the Vigdis Knutsen plus approximately $17.9 million for a receivable owed by Knutsen NYK to KNOT 25 (the “KNOT 25 Receivable”) and approximately $0.9 million for certain capitalized fees related to the financing of the Tordis Knutsen. On the closing of the Acquisition, KNOT 25 will repay approximately $42.9 million of the indebtedness, leaving an aggregate of approximately $94.9 million of debt outstanding under the secured credit facility related to the vessel (the “Vigdis Facility”). The Vigdis Facility is repayable in quarterly installments with a final balloon payment of $70.8 million due at maturity in May 2022. The Vigdis Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.9%.

The purchase price will be settled in cash and will be subject to certain post-closing adjustments for working capital and interest rate swaps. On the closing of the Acquisition, Knutsen NYK will repay the KNOT 25 Receivable.

The Vigdis Knutsen was delivered in February 2017 and is operating in Brazil under a five-year time charter with a subsidiary of Royal Dutch Shell plc, which will expire in the second quarter of 2022. The charterer has options to extend the charter for two five-year periods.

The Board and the Conflicts Committee have approved the purchase price of the Acquisition. The Conflicts Committee retained an outside financial advisor to assist with its evaluation of the Acquisition.

The Partnership estimates that the Acquisition will generate approximately $7.7 million of net income and approximately $16.2 million of EBITDA4 for the twelve months following the closing of the Acquisition. However, the Partnership may not realize this level of estimated net income or EBITDA from the Acquisition during such 12-month period.

4 Please see Appendix A for guidance on the underlying assumptions used to derive KNOT 25’s estimated EBITDA and estimated net income, and a reconciliation of KNOT 25’s estimated EBITDA to estimated net income the most directly comparable GAAP financial measure for the twelve months following the Acquisition.

Hilda Knutsen Refinancing

On March 31, 2017, the Partnership’s subsidiary, KNOT Shuttle Tankers 14 AS, which owns the vessel Hilda Knutsen, entered into an agreement for a new $100 million senior secured term loan facility with Mitsubishi UFJ Lease & Finance (Hong Kong) Limited (the “MUL Facility”). The MUL Facility will be repayable in twenty-eight (28) consecutive quarterly installments with a balloon payment of $58.5 million due at maturity. The MUL Facility will bear interest at a rate per annum equal to LIBOR plus a margin of 2.2%. The facility matures in 2024 and is guaranteed by the Partnership. The new facility will refinance a $75.6 million loan facility associated with the Hilda Knutsen that bears interest at a rate of LIBOR plus 2.5% and is due to be paid in full in August 2018. Closing of the MUL Facility is anticipated to occur by the end of May 2017.

Partnership Matters

Effective April 1, 2017, the Partnership’s general partner appointed Mr. Richard Beyer to replace Mr. Hiroaki Nishiyama as an appointed director on the Partnership’s Board. Mr. Beyer has been a member of the board of directors of the Partnership’s general partner and KNOT Offshore Partners UK LLC since 2013 and is a director of NYK Group Europe Limited and NYK Energy Transport (Atlantic) Limited. Before joining NYK Group Europe Limited, Mr. Beyer was a Senior Legal Adviser to BP Shipping Limited. Mr. Beyer was admitted as an English solicitor in 1995.

Outlook

The Partnership expects its earnings for the second quarter of 2017 to be significantly higher than its earnings for the first quarter of 2017, as there will be no scheduled offhire, and the remaining loss of revenue from the offhire on the Raquel Knutsen is covered by insurance policies. In addition, the Partnership expects to receive full quarterly earnings from the Tordis Knutsen and approximately one month of earnings from the Vigdis Knutsen, subject to closing of the Acquisition on June 1, 2017.

As of March 31, 2017, the Partnership’s fleet of twelve vessels had an average remaining fixed contract duration of 4.8 years. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 3.6 years on average.

The Partnership expects to receive options to acquire two additional vessels owned by Knutsen NYK pursuant to the terms of the omnibus agreement entered into in connection with the Partnership’s initial public offering (“IPO”). As of March 31, 2017, the average remaining fixed contract duration for the two vessels is 5.0 years. In addition, the charterers have options to extend these charters by 10.5 years on average.

Pursuant to the omnibus agreement, the Partnership also has the option to acquire from Knutsen NYK any offshore shuttle tankers that Knutsen NYK acquires or owns that are employed under charters for periods of five or more years.

There can be no assurance that the Partnership will acquire any additional vessels from Knutsen NYK.

The Board believes that demand for new build offshore shuttle tankers will continue to be driven over time based on the requirement to replace older tonnage such as in the North Sea and Brazil and further expansion into deep water offshore oil production areas such as in Pre-salt Brazil and the Barents Sea. The Board further believes that there will be and is significant growth in demand for new shuttle tankers as the availability of existing vessels has reduced and modern operational demands have increased. Consequently, there should be opportunities to further grow the Partnership.

 

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