News Column

KNOT Offshore Partners LP Earnings Release - Interim Results for the Period Ended December 31, 2013

February 19, 2014

Highlights

  • For the fourth quarter of 2013, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):
  • Generated net income of $7.9 million and operating income of $10.0 million;
  • Generated Adjusted EBITDA of $16.8 million;(1) and
  • Generated distributable cash flow of $9.8 million.(2)
  • On February 14, 2014, KNOT Offshore Partners paid a quarterly distribution of $0.4350 per unit with respect to the quarter ended December 31, 2013. This corresponds to a distribution of $1.74 per unit on an annual basis.

    ABERDEEN, Scotland--(BUSINESS WIRE)--

    Financial Results Overview

    KNOT Offshore Partners reports net income of $7.9 million and operating income of $10.0 million for the fourth quarter of 2013, as compared to net income of $1.5 million and operating income of $5.7 million for the same period in the prior year.

    All vessels operated well throughout the quarter with 98.5% utilization (3.5 days offhire). Operating income increased by $4.3 million and finance expenses decreased by $1.5 million in the fourth quarter of 2013 compared to the fourth quarter of 2012. The increase in operating income is due to the Carmen Knutsen being included in the Partnership’s operating results for the full fourth quarter of 2013. The reduction in finance expense was primarily related to the repayment of debt in connection with the Partnership’s initial public offering in April 2013 (the “IPO”) and transfer of mark to market costs related to interest rate swaps entered into prior to the IPO to the Partnership’s sponsor, Knutsen NYK Offshore Tankers AS (“KNOT”).

    (1)   Adjusted EBITDA is a non-GAAP financial measure used by investors to measure the performance of master limited partnerships. Please see Appendix A for a reconciliation to the most directly comparable GAAP financial measure.
    (2) Distributable cash flow is a non-GAAP financial measure used by investors to measure the performance of master limited partnerships. Please see Appendix A for a reconciliation to the most directly comparable GAAP financial measure.

    In accordance with generally accepted accounting principles in the United States (“GAAP”), prior to April 16, 2013, the results of operations, cash flows and balance sheet of the Partnership have been carved out of the consolidated financial statements of KNOT. Accordingly, the Partnership’s financial statements prior to April 16, 2013 reflect allocation of certain expenses, including the mark-to-market value of interest rate swap derivatives. The realized and unrealized gain on derivatives, in the amounts of $0.1 million for the fourth quarter 2012 do not affect cash flow or the calculation of distributable cash flow whilst the realized and unrealized gain for fourth quarter 2013 of $0.9 million decrease the distributable cash flow. The amount for the fourth quarter of 2012 has been eliminated from the Partnership’s opening equity as of April 16, 2013, as none of KNOT’s interest rate swap agreements were transferred to the Partnership on completion of the IPO. The Partnership has no further obligations related to these contracts.

    Financing and Liquidity

    On April 15, 2013, the Partnership completed its IPO of 8,567,500 common units (including 1,117,500 common units sold pursuant to the exercise in full of the underwriters’ option to purchase additional common units). The Partnership’s common units are listed on the New York Stock Exchange under the symbol “KNOP.” KNOT owns a 49.0% limited partner interest in the Partnership and, through its ownership of the Partnership’s general partner, a 2.0% general partner interest in the Partnership.

    In November 2013, the Partnership entered into foreign exchange forward contracts, selling a total notional amount of $20.0 million against Norwegian Kroner (“NOK”) at an average exchange rate of 6.22 NOK/$, which are economic hedges for certain vessel operating expenses and general and administrative expenses in NOK.

    As of December 31, 2013, the Partnership had cash and cash equivalents of $28.8 million. Total interest bearing debt outstanding was $350.0 million, as of December 31, 2013. The average margin paid on the Partnership’s outstanding debt during the quarter ended December 31, 2013 was approximately 2.7% over LIBOR.

    As of December 31, 2013, the Partnership has entered into various interest rate swap agreements effective until March, April and May, 2018, for a total notional amount of $200 million to hedge against the interest rate risks of its variable-rate borrowings. Under the terms of the interest rate swap agreements, the Partnership will receive from the counterparty interest on the notional amount based on three-month LIBOR and will pay to the counterparty a fixed rate. For the interest rate swap agreements above, the Partnership will pay to the counterparty a fixed rate ranging from 1.25% to 1.44%.

    In February 2014, the Partnership entered into two interest rate swap agreements effective in February 2014, and ending in August 2018. The interest rate swap agreements have a total initial notional amount of $50.0 million. Under the terms of the interest rate swap agreements, the Partnership will receive from the counterparty interest on the notional amount based on three-month LIBOR and will pay to the counterparty a fixed rate of 1.45%.

    Outlook

    Under the Omnibus Agreement the Partnership entered into with KNOT in connection with the IPO ( the “Omnibus Agreement”), there are four additional identified vessels which the Partnership has the option to purchase within 24 months of their delivery to charterers.

    Pursuant to the Omnibus Agreement, the Partnership also has the option to acquire from KNOT all offshore shuttle tankers that KNOT acquires or owns that will be employed under contracts for periods more than five years.

    We have been advised that KNOT has entered into a contract to purchase three vessels from J. Lauritzen, of which two, the “Dan Sabia” and the “Dan Cisne”, are on long-term bareboat charters to Transpetro ending in the third quarter of 2023 and first quarter of 2024, respectively. The closing of the acquisition is subject to technical inspection and approval from the charterer. Upon consummation of the acquisition, we anticipate that the Dan Sabia and the Dan Cisne will be offered to the Partnership under the terms of the Omnibus Agreement. There can be no assurance that KNOT’s acquisition of these vessels will be consummated or that the Partnership will acquire such vessels from KNOT.

    BG Group (“BG”) is in the process of considering whether to exercise its option to extend its charter of the Windsor Knutsen for one year. BG has the option to extend its charter for the Windsor Knutsen up to April 2016. The initial term of the Windsor Knutsen charter with BG expires in April 2014. Pursuant to the Omnibus Agreement, in the event that BG does not extend its charter, KNOT will guarantee the rate of hire for the Windsor Knutsen until April 2018.

    Production delays related to new projects are continuing both in Brazil and the North Sea, causing a temporary vessel surplus since vessels targeting said projects are being delivered. The Board of Directors of the Partnership (the “Board”) believes that through the Partnership’s relationship with KNOT, there are significant opportunities for growth for the Partnership. Activity in the offshore oil industry continues to be relatively high based on identified projects and, accordingly, the demand for offshore shuttle tankers is expected to continue to grow.

    The Board is pleased with the results of operations of the Partnership for the period ended December 31, 2013, which were consistent with expectations for the Partnership’s initial operations following the completion of the IPO, and is confident that the Partnership continues to be well positioned to grow its earnings and distributions.

    About KNOT Offshore Partners LP

    KNOT Offshore Partners owns, operates and acquires shuttle tankers under long-term charters in the offshore oil production regions of the North Sea and Brazil. KNOT Offshore Partners owns and operates a fleet of five offshore shuttle tankers operating under long-term charters to oil majors.

    KNOT Offshore Partners is structured as a publicly-traded master limited partnership. KNOT Offshore Partners’ common units trade on the New York Stock Exchange under the symbol “KNOP.”

    The Partnership plans to host a conference call on Wednesday, February 19, 2014 at noon (ET) to discuss the results for the fourth quarter of 2013. All unitholders and interested parties are invited to listen to the live conference call by choosing from the following options:

  • By dialing 1-866-270-1533 or 1-412-317-0797, if outside North America.
  • By accessing the webcast, which will be available on the Partnership’s website: www.knotoffshorepartners.com

    February 19, 2014

    KNOT Offshore Partners LP

    Aberdeen, United Kingdom

    Questions should be directed to:

    Arild Vik (+44 7581 899 777)

    UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT STATEMENTS OF OPERATIONS

                                                     
    Three Months Ended       Year Ended

    December 31,
     
    (USD in thousands)December 31,

    2013

            September 30,

    2013

      December 31,

    2012

    2013         2012
    Time charter and bareboat revenues 1)     22,216     20,454     16,819     73,151     62,078
    Loss of hire insurance recoveries

    250

     

    3,575

    Total revenues22,21620,45416,81973,40165,653
    Vessel operating expenses 4,427 3,830 3,355 14,288 13,000
    Depreciation and amortization 6,785 6,304 5,282 23,768 21,181
    General and administrative expenses 1,001 960 2,505 5,361 4,834
    Total operating expenses12,21311,09411,14243,41739,015
    Operating income10,0039,3605,67729,98426,638
    Finance income (expense):
    Interest income 5 16 4 30 19
    Interest expense (2,832 ) (2,653 ) (3,126 ) (10,773 ) (13,471 )
    Other finance expense (250 ) (150 ) (810 ) (2,048 ) (3,378 )
    Realized and unrealized gain (loss)

    on derivative instruments

    845 (252 ) 136 505 (6,031 )
    Net gain (loss) on foreign currency transactions 20 31 78 193 (1,771 )
    Total finance expense(2,212)(3,008)(3,718)(12,093)(24,632)
    Income before income taxes7,7916,3521,95917,8912,006
    Income tax benefit (expense) 2) 111 5 (484 ) (2,827 ) (1,261 )
    Net income7,9026,3571,47515,064745
    Net income attributable to non-controlling interests
    Net income (loss) attributable to

    KNOT Offshore Partners LP Owners

    7,9026,3571,47515,064745
     
    Weighted average units outstanding

    (in thousands of units):

       
    8,567,500 8,567,500 8,567,500
    Subordinated units 8,567,500 8,567,500 8,567,500
    General partner units 349,694 349,694 349,694
    1)   Time charter revenue for the fourth and for the third quarter of 2013 include a non-cash item of approximately $0.5 million in reversal of contract liability provision.
    2) Tax benefit is currency effect on taxes payable

    UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT BALANCE SHEET

             
    (USD in thousands)At December 31,

    2013

            At September 30,

    2013

        At December 31,

    2012

     
    ASSETS        
    Current assets:
    Cash and cash equivalents 28,836 28,483 1,287
    Restricted cash 458 1,461 830
    Trade accounts receivable 99
    Amounts due from related parties 77 145
    Inventories 578 680 541
    Deferred tax asset 290
    Derivative assets 248
    Other current assets 1,814 2,335 3,459
    Total current assets32,01133,1046,506
    Long-term assets:
    Vessels and equipment:
    Vessels 692,927 692,911 548,141
    Less accumulated depreciation and amortization(75,142) (68,357 )(51,373)
    Net property, plant, and equipment 617,785 624,554 496,768
    Goodwill 5,750 5,750 5,750
    Deferred debt issuance cost 2,010 2,233 2,787
    Derivative assets 2,617
    Total assets660,173665,641511,811
     
    LIABILITIES AND PARTNERS’ EQUITY/OWNER’S CAPITAL
    Current liabilities:
    Trade accounts payable 1,107 1,337 370
    Accrued expenses 2,642 4,246 1,803
    Current installments of long-term debt 29,269 29,044 28,833
    Derivative liabilities 2,124 252 5,258
    Income taxes payable 743 746
    Contract liabilities 1,518 1,518 1,518
    Prepaid charter and deferred revenue 4,471 2,371 4,369
    Amount due to related parties 163 444 12,423
    Total current liabilities42,03739,95854,574
    Long-term liabilities:
    Long-term debt, excluding current installments 310,359 317,596 319,017
    Derivative liabilities 22,622
    Contract liabilities 12,793 13,173 14,311
    Deferred tax liabilities 2,141 2,249 3,097
    Long-term debt from related parties 10,349 10,349
    Other long-term liabilities 567 675 996
    Total liabilities378,246384,000414,617
    Equity:
    Owner’s equity 97,194
    Partner’s capital:
    Common unitholders 168,773 168,632
    Subordinated unitholders 107,857 107,717
    General partner interest 5,297 5,292
    Total Partners’ capital281,927281,641
    Total liabilities and equity           660,173           665,641           511,811    

    As of April 16, 2013, the financial statements of the Partnership as a separate legal entity are presented on a consolidated basis. Prior to April 16, 2013, the results of operations, cash flow and balance sheet have been carved out of the consolidated financial statements of KNOT and therefore are presented on a combined carve-out basis. The combined entity’s historical combined financial statements include assets, liabilities, revenues, expenses and cash flows directly attributable to the Partnership’s interests in the four vessels in its initial fleet. Accordingly, the historical combined carve-out interim financial statements prior to April 16, 2013 reflect allocations of certain administrative and other expenses, mark-to-market valuations of interest rate and foreign currency swap derivatives. The basis for the allocations are described in note 2 of the restated combined financial statements for the year ended December 31, 2012 filed by KNOT Offshore Partners with the U.S. Securities and Exchange Commission (the “SEC”) on September 6, 2013. These allocated costs have been accounted for as an equity contribution in the combined balance sheets.

    APPENDIX A - RECONCILATION OF NON-GAAP FINANCIAL MEASURES

    Distributable Cash Flow

    Distributable cash flow represents net income adjusted for depreciation and amortization, unrealized gains and losses from derivatives, unrealized foreign exchange gains and losses, other non-cash items and estimated maintenance and replacement capital expenditures. Estimated maintenance and replacement capital expenditures, including estimated expenditures for drydocking, represent capital expenditures required to maintain over the long-term the operating capacity of, or the revenue generated by our capital assets. Distributable cash flow is a quantitative standard used by investors in publicly-traded partnerships to assist in evaluating a partnership’s ability to make quarterly cash distributions. Distributable cash flow is a non-GAAP financial measure and should not be considered as an alternative to net income or any other indicator of KNOT Offshore Partners’ performance calculated in accordance with GAAP. The table below reconciles distributable cash flow to net income, the most directly comparable GAAP measure.

               
    (USD in thousands)Three Months

    Ended December 31,

    2013

    (unaudited)
    Net income7,902
    Add:
    Depreciation and amortization 6,785
    Other non-cash items; deferred costs amortization debt 287
     
    Less:
    Estimated maintenance and replacement capital expenditures (including drydocking reserve) (3,738 )
    Deferred revenue (486 )
    Unrealized gain from interest rate derivatives and forward exchange currency contracts     (994 )
     
    Distributable cash flow     9,756

    Adjusted EBITDA

    Adjusted EBITDA refers to earnings before interest, other financial items, taxes, non-controlling interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure used by investors to measure our performance.

    The Partnership believes that Adjusted EBITDA assists its management and investors by increasing the comparability of its performance from period to period and against the performance of other companies in its industry that provide Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, taxes and depreciation and amortization, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. The Partnership believes that including Adjusted EBITDA as a financial measure benefits investors in (a) selecting between investing in the Partnership and other investment alternatives and (b) monitoring the Partnership’s ongoing financial and operational strength in assessing whether to continue to hold common units. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to net income or any other indicator of Partnership performance calculated in accordance with GAAP. The table below reconciles Adjusted EBITDA to net income, the most directly comparable GAAP measure.

               
    (USD in thousands)Three Months

    Ended December 31,

    2013

    (unaudited)
    Net income7,902
    Interest income (5 )
    Interest expenses 2,832
    Depreciation and amortization 6,785
    Income tax (benefits) expense (111 )
    EBITDA 17,403
    Other financial items (a)     (615 )
     
    Adjusted EBITDA     16,788
    (a) Other financial items consist of other finance expense, realized and unrealized loss on derivative instruments and net loss on foreign currency transactions.

    FORWARD LOOKING STATEMENTS

    This press release contains certain forward-looking statements concerning future events and KNOT Offshore Partners’ operations, performance and financial condition. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” “plan,” “intend” or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond KNOT Offshore Partners’ control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to:• statements about market trends in the shuttle tanker or general tanker industries, including charter rates, factors affecting supply and demand, and opportunities for the profitable operations of offshore shuttle tankers;

    statements about KNOT’s and KNOT Offshore Partners’ ability to build and retrofit offshore shuttle tankers and the timing of the delivery and acceptance of any such retrofitted vessels by their respective charterers;

    • KNOT Offshore Partners’ ability to increase distributions and the amount of any such increase;

    • KNOT Offshore Partners’ ability to integrate and realize the expected benefits from acquisitions;

    • KNOT Offshore Partners’ anticipated growth strategies;

    • the effect of the worldwide economic slowdown;

    • turmoil in the global financial markets;

    • fluctuations in currencies and interest rates;

    • general market conditions, including fluctuations in charter hire rates and vessel values;

    • changes in KNOT Offshore Partners’ operating expenses, including drydocking and insurance costs and bunker prices;

    • forecasts of KNOT Offshore Partners’ ability to make cash distributions on the units or any increases in cash distributions;

    • KNOT Offshore Partners’ future financial condition or results of operations and future revenues and expenses;

    • the repayment of debt and settling of any interest rate swaps;

    • KNOT Offshore Partners’ ability to make additional borrowings and to access debt and equity markets;

    • planned capital expenditures and availability of capital resources to fund capital expenditures;

    • KNOT Offshore Partners’ ability to maintain long-term relationships with major users of shuttle tonnage;

    • KNOT Offshore Partners’ ability to leverage KNOT’s relationships and reputation in the shipping industry;

    • KNOT Offshore Partners’ ability to purchase vessels from KNOT in the future;

    • KNOT Offshore Partners’ continued ability to enter into long-term time charters;

    • KNOT Offshore Partners’ ability to maximize the use of its vessels, including the re-deployment or disposition of vessels no longer under long-term time charter;

    • timely purchases and deliveries of newbuilding vessels;

    • future purchase prices of newbuildings and secondhand vessels;

    • KNOT Offshore Partners’ ability to compete successfully for future chartering and newbuilding opportunities;

    • acceptance of a vessel by its charterer;

    • termination dates and extensions of charters;

    • the expected cost of, and KNOT Offshore Partners’ ability to, comply with governmental regulations, maritime self-regulatory organization standards, as well as standard regulations imposed by its charterers applicable to KNOT Offshore Partners’ business;

    • availability of skilled labor, vessel crews and management;

    • KNOT Offshore Partners’ general and administrative expenses and its fees and expenses payable under the fleet management agreements and the management and administrative services agreement;

    • the anticipated taxation of KNOT Offshore Partners and distributions to KNOT Offshore Partners’ unitholders;

    • estimated future maintenance and replacement capital expenditures;

    • KNOT Offshore Partners’ ability to retain key employees;

    • customers’ increasing emphasis on environmental and safety concerns;

    • potential liability from any pending or future litigation;

    • potential disruption of shipping routes due to accidents, political events, piracy or acts by terrorists;

    • future sales of KNOT Offshore Partners’ securities in the public market;

    • KNOT Offshore Partners’ business strategy and other plans and objectives for future operations; and

    • other factors listed from time to time in the reports and other documents that KNOT Offshore Partners files with the SEC.

    All forward-looking statements included in this release are made only as of the date of this release on. New factors emerge from time to time, and it is not possible for KNOT Offshore Partners to predict all of these factors. Further, KNOT Offshore Partners cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. KNOT Offshore Partners does not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in KNOT Offshore Partners expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.





    KNOT Offshore Partners LP

    Arild Vik

    +44 7581 899 777




    Source: KNOT Offshore Partners LP


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