6-K
KNOT Offshore Partners LP (KNOP)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of March 2020
Commission File Number 001-35866
KNOT Offshore Partners LP
(Translation of registrant’s name into English)
2 Queen’s Cross,
Aberdeen, Aberdeenshire
United Kingdom
AB15 4YB
United Kingdom
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F x Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(1).
Yes o No x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(7).
Yes o No x
ITEM 1 — INFORMATION CONTAINED IN THIS FORM 6-K REPORT
Attached as Exhibit 99.1 is a copy of the press release of KNOT Offshore Partners LP dated March 11, 2020.
| ITEM 2 | — EXHIBITS |
|---|
The following exhibits are filed as a part of this report:
| Exhibit Number | Exhibit Description |
|---|---|
| 99.1 | Press release dated March 11, 2020. |
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KNOT OFFSHORE PARTNERS LP | |||
|---|---|---|---|
| Date: March 11, 2020 | |||
| By: | /s/ Gary Chapman | ||
| Name: | Gary Chapman | ||
| Title: | Chief Executive Officer and Chief Financial Officer |
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Exhibit 99.1
KNOT OFFSHORE PARTNERS LP
EARNINGS RELEASE—INTERIM RESULTS FOR THE PERIOD ENDED DECEMBER 31, 2019
Highlights
For the three months ended December 31, 2019, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):
· Generated total revenues of $70.1 million, operating income of $31.0 million and net income of $23.8 million
· Generated Adjusted EBITDA of $53.6 million (1)
· Generated distributable cash flow of $26.4 million (1)
· Reported a distribution coverage ratio of 1.46 (2)
· Fleet operated with 99.7% utilization for scheduled operations and 98.5% utilization taking into account the scheduled drydocking of the Raquel Knutsen, which was offhire for 18 days in the fourth quarter of 2019.
Other events:
· On October 4, 2019, Equinor ASA (“Equinor”) exercised its option to extend the time charter of the Bodil Knutsen by one additional year until May 2021.
· On October 17, 2019, Eni Trading and Shipping S.p.A. (“Eni”) exercised its option to extend the time charter of the Torill Knutsen by one additional year until November 2020.
· On February 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended December 31, 2019 to all common unitholders of record on January 31, 2020. On February 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended December 31, 2019 in an aggregate amount equal to $1.8 million.
Financial Results Overview
Total revenues were $70.1 million for the three months ended December 31, 2019 (the “fourth quarter”) compared to $71.0 million for the three months ended September 30, 2019 (the “third quarter”). The decrease was mainly related to reduced earnings from the Raquel Knutsen which was offhire for 18 days in the fourth quarter due to the mobilization to Europe for drydocking. The vessel’s drydocking was accelerated as the charterer elected to take a voyage to Europe.
Vessel operating expenses for the fourth quarter of 2019 were $15.4 million, an increase of $0.4 million from $15.0 million in the third quarter of 2019. The increase was mainly due to higher operating cost on average for the fleet due to periodic purchasing and increased operating activities.
General and administrative expenses were $1.1 million for the fourth quarter compared to $1.2 million in the third quarter.
(1) EBITDA, Adjusted EBITDA and distributable cash flow are non-GAAP financial measures used by management and external users of the Partnership’s 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) Distribution coverage ratio is equal to distributable cash flow divided by distributions declared for the period presented.
1
Depreciation was $22.6 million for the fourth quarter, an increase of $0.2 from $22.4 million in the third quarter. The increase is mainly due to increased depreciation for the Raquel Knutsen due to its accelerated drydocking.
As a result, operating income for the fourth quarter was $31.0 million compared to $32.4 million in the third quarter.
Interest expense for the fourth quarter was $11.4 million, a decrease of $1.1 from $12.5 million for the third quarter. The decrease was mainly due to lower LIBOR on average for all credit facilities.
Realized and unrealized gain on derivative instruments was $4.2 million in the fourth quarter, compared to a loss of $5.7 million in the third quarter. The unrealized non-cash element of the mark-to-market gain was $4.9 million for the fourth quarter of 2019 compared to a loss of $6.5 million for the third quarter of 2019. Of the unrealized gain for the fourth quarter of 2019, $3.5 million is related to a mark-to-market gain on interest rate swaps due to a decrease in the US swap rate and a gain of $1.4 million related to foreign exchange contracts.
As a result, net income for the fourth quarter of 2019 was $23.8 million compared to $14.1 million for the third quarter of 2019.
Net income of $23.8 million for the fourth quarter of 2019 increased by $15.0 million from net income of $8.8 million for the three months ended December 31, 2018. The operating income of $31.0 million for the fourth quarter of 2019 decreased by $2.0 million compared to operating income of $33.0 million in the fourth quarter of 2018, mainly due to reduced earnings from the Bodil Knutsen due to its reduced daily rate from May 2019 when the vessel began operating under its new time charter option and higher operating cost on average for the fleet. This was partly offset by full earnings from the Ingrid Knutsen which went offhire in the fourth quarter of 2018 due to its scheduled drydocking. Total finance expense for the fourth quarter of 2019 decreased by $16.9 million to $7.3 million compared to finance expense of $24.2 million for the fourth quarter of 2018. The decrease was mainly due to decreased unrealized loss on derivative instruments mainly due to a lower US swap rate.
Distributable cash flow was $26.4 million for the fourth quarter of 2019 compared to $28.0 million for the third quarter of 2019. The decrease in distributable cash flow is mainly due to reduced earnings from the Raquel Knutsen due to its scheduled drydocking and higher operating expenses on average for the fleet. The distribution declared for the fourth quarter of 2019 was $0.52 per common unit, equivalent to an annualized distribution of $2.08.
Operational Review
The Partnership’s vessels operated throughout the fourth quarter of 2019 with 99.7% utilization for scheduled operations and 98.5% utilization taking into account the scheduled drydocking of the Raquel Knutsen.
On October 4, 2019, Equinor exercised its option to extend the time charter of the Bodil Knutsen by one additional year until May 2021. Equinor has three one-year options to extend the time charter until May 2024.
On October 17, 2019, Eni exercised its option to extend the time charter of the Torill Knutsen by one additional year until November 2020. Eni has three one-year options to extend the time charter until November 2023.
The Raquel Knutsen went offhire on December 14, 2019 for the mobilization trip to a shipyard in Portugal in order to complete her planned 5-year special survey drydocking. The Raquel Knutsen went back on charter on March 5, 2020
Financing and Liquidity
As of December 31, 2019, the Partnership had $72.2 million in available liquidity, which consisted of cash and cash equivalents of $43.5 million and $28.7 million of capacity under its revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023. The Partnership’s total interest-bearing debt outstanding as of December 31, 2019 was $1,002.8 million ($995.4 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the fourth quarter of 2019 was approximately 2.1% over LIBOR.
As of December 31, 2019, the Partnership had entered into one foreign exchange forward contract, selling a total notional amount of $5.0 million against the NOK at an exchange rate of NOK 9.22 per 1.00 U.S. Dollar. The foreign exchange forward contract is economic hedges for certain vessel operating expenses and general expenses in NOK.
As of December 31, 2019, the Partnership had entered into various interest rate swap agreements for a total notional amount of $561.8 million to hedge against the interest rate risks of its variable rate borrowings. As of December 31, 2019, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.87% under its interest rate swap agreements, which have an average maturity of approximately 4.0 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.
2
As of December 31, 2019, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $397.5 million based on total interest-bearing debt outstanding of $1,002.8 million, less interest rate swaps of $561.8 million and less cash and cash equivalents of $43.5 million. The Partnership’s outstanding interest-bearing debt of $1,002.8 million as of December 31, 2019 is repayable as follows:
| (U.S. Dollars in thousands) | Period repayment | Balloon repayment | ||
|---|---|---|---|---|
| 2020 | $ | 85,945 | $ | — |
| 2021 | 86,545 | 95,811 | ||
| 2022 | 71,210 | 236,509 | ||
| 2023 | 55,535 | 202,185 | ||
| 2024 | 13,873 | 123,393 | ||
| 2025 and thereafter | 1,307 | 30,500 | ||
| Total | $ | 314,415 | $ | 688,398 |
Distributions
On February 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended December 31, 2019 to all common unitholders of record on January 31, 2020. On February 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended December 31, 2019 in an aggregate amount equal to $1.8 million.
Outlook
The Partnership’s earnings for the first quarter in 2020 will be affected by the completion of the planned 5-year special survey drydocking of the Raquel Knutsen. The Raquel Knutsen went offhire on December 14, 2019 and was back on charter on March 5, 2020, incurring approximately 82 days of offhire. There are no other planned drydockings in 2020.
As of December 31, 2019, the Partnership’s fleet of sixteen vessels had an average remaining fixed contract duration of 2.8 years. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 4.3 years on average.
In September 2018, Knutsen NYK Offshore Tankers AS, the owner of the Partnership’s general partner (“Knutsen NYK”), entered into new long- term charters with Equinor for two Suezmax DP2 shuttle tanker newbuildings to be constructed by Hyundai Heavy Industries in South Korea with delivery scheduled for the second half of 2020. The vessels are expected to operate in Brazil under time charter contracts with a term of 5 and 7 years fixed period with options for up to 20 years.
In August 2019, Knutsen NYK was awarded one new long-term charter with a subsidiary of Total S.A. The new DP2 shuttle tanker will be built by COSCO shipyard in China, with delivery scheduled for early 2021. The vessel is expected to operate in Brazil under a time charter contract for a maximum 15 year period.
In February 2020, Knutsen NYK entered into new long-term charters with Eni for two LNG fueled shuttle tankers to be constructed by Daewoo Shipbuilding & Marine Engineering Co. Ltd shipyard in Korea with delivery scheduled for mid-2022. The vessels will operate in North Sea under time charter contracts with a term of 5 and 7 years fixed period with options for up to 10 years.
Pursuant to the omnibus agreement the Partnership entered into with Knutsen NYK at the time of its initial public offering, the Partnership 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 existing and, in particular, for newbuild offshore shuttle tankers will continue to be driven over the long term based on the requirement to replace older tonnage 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. Although the Partnership’s operations have not yet been impacted by the recent outbreak of the COVID-19 virus (“Coronavirus”) or the recent decline in oil prices, the length and severity of the Coronavirus outbreak and the persistence of a low oil price environment cannot be estimated at this time. Such developments could affect the number of new offshore projects and the overall outlook for the production of oil, which could eventually and in turn impact the demand and pricing for shuttle tankers.
3
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 sixteen offshore shuttle tankers with an average age of 6.5 years.
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 Thursday, March 12, 2020 at noon (Eastern Time) to discuss the results for the fourth quarter of 2019, and invites all unitholders and interested parties to listen to the live conference call by choosing from the following options:
· By dialing 1-855-209-8259 or 1-412-542-4105, if outside North America.
· By accessing the webcast, which will be available for the next seven days on the Partnership’s website: www.knotoffshorepartners.com.
| March 11, 2020 |
|---|
| KNOT Offshore Partners L.P. |
| Aberdeen, United Kingdom |
| Questions should be directed to: |
| Gary Chapman (+44 7496 170 620) |
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| **** | Three Months Ended | **** | Year Ended December 31, | **** | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars in thousands) | December 31, 2019 | **** | September 30, 2019 | **** | December 31, 2018 | **** | 2019 | **** | 2018 | **** | |||||
| Time charter and bareboat revenues (1) | $ | 70,063 | $ | 70,983 | $ | 70,878 | $ | 282,502 | $ | 278,191 | |||||
| Loss of hire insurance recoveries | — | — | — | — | 450 | ||||||||||
| Other income (2) | 18 | 26 | 53 | 59 | 815 | ||||||||||
| Total revenues | 70,081 | 71,009 | 70,931 | 282,561 | 279,456 | ||||||||||
| Vessel operating expenses | 15,401 | 14,971 | 14,221 | 60,129 | 56,730 | ||||||||||
| Depreciation | 22,554 | 22,430 | 22,450 | 89,844 | 88,756 | ||||||||||
| General and administrative expenses | 1,105 | 1,190 | 1,289 | 4,858 | 5,290 | ||||||||||
| Total operating expenses | 39,060 | 38,591 | 37,960 | 154,831 | 150,776 | ||||||||||
| Operating income | 31,021 | 32,418 | 32,971 | 127,730 | 128,680 | ||||||||||
| Finance income (expense): | |||||||||||||||
| Interest income | 169 | 225 | 247 | 865 | 739 | ||||||||||
| Interest expense | (11,433 | ) | (12,459 | ) | (13,364 | ) | (50,735 | ) | (49,956 | ) | |||||
| Other finance expense | (183 | ) | (258 | ) | (228 | ) | (845 | ) | (1,260 | ) | |||||
| Realized and unrealized gain (loss) on derivative instruments (3) | 4,198 | (5,749 | ) | (10,905 | ) | (17,797 | ) | 4,039 | |||||||
| Net gain (loss) on foreign currency transactions | (5 | ) | (29 | ) | 91 | (252 | ) | (79 | ) | ||||||
| Total finance expense | (7,254 | ) | (18,270 | ) | (24,159 | ) | (68,764 | ) | (46,517 | ) | |||||
| Income before income taxes | 23,767 | 14,148 | 8,812 | 58,966 | 82,163 | ||||||||||
| Income tax benefit (expense) | (3 | ) | — | 18 | (9 | ) | 2 | ||||||||
| Net income | 23,764 | 14,148 | 8,830 | 58,957 | 82,165 | ||||||||||
| Weighted average units outstanding (in thousands of units): | |||||||||||||||
| Common units | 32,694 | 32,694 | 32,694 | 32,694 | 32,694 | ||||||||||
| General Partner units | 615 | 615 | 615 | 615 | 615 |
(1) Time charter revenues for the fourth quarter of 2019, third quarter of 2019 and the fourth quarter of 2018 include a non-cash item of approximately $28,000, $29,000 and $0.9 million, respectively, in reversal of contract liability and asset provision, income recognition of prepaid charter hire and accrued income for the Carmen Knutsen and for the Brasil Knutsen based on the average charter rate for the fixed period.
(2) Other income is mainly related to guarantee income from Knutsen NYK. Pursuant to the omnibus agreement, Knutsen NYK agreed to guarantee the payments of the hire rate that is equal to or greater than the hire rate payable under the initial charters of the Bodil Knutsen and the Windsor Knutsen for a period of five years from the closing date of the Partnership’s initial public offering. In October 2015, the Windsor Knutsen commenced operating under a new Shell time charter. The hire rate for this charter was below the initial charter hire rate and the difference between such hire rate and the initial rate was paid by Knutsen NYK until April 15, 2018.
(3) Realized gains (losses) on derivative instruments relate to amounts the Partnership actually received (paid) to settle derivative instruments, and the unrealized gains (losses) on derivative instruments related to changes in the fair value of such derivative instruments, as detailed in the table below:
5
| **** | Three Months Ended | **** | Year Ended December 31 | **** | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars in thousands) | December 31, 2019 | **** | September 30, 2019 | **** | December 31, 2018 | **** | 2019 | **** | 2018 | **** | |||||
| Realized gain (loss): | |||||||||||||||
| Interest rate swap contracts | $ | 597 | $ | 969 | $ | 711 | $ | 3,812 | $ | 1,180 | |||||
| Foreign exchange forward contracts | (1,282 | ) | (206 | ) | (359 | ) | (2,933 | ) | 1,084 | ||||||
| Total realized gain (loss): | (685 | ) | 763 | 352 | 879 | 2,264 | |||||||||
| Unrealized gain (loss): | |||||||||||||||
| Interest rate swap contracts | 3,516 | (5,560 | ) | (9,896 | ) | (20,663 | ) | 4,428 | |||||||
| Foreign exchange forward contracts | 1,367 | (952 | ) | (1,361 | ) | 1,987 | (2,653 | ) | |||||||
| Total unrealized gain (loss): | 4,883 | (6,512 | ) | (11,257 | ) | (18,676 | ) | 1,775 | |||||||
| Total realized and unrealized gain (loss) on derivative instruments: | $ | 4,198 | $ | (5,749 | ) | $ | (10,905 | ) | $ | (17,797 | ) | $ | 4,039 |
6
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
| (U.S. Dollars in thousands) | At December 31, 2019 | At December 31, 2018 | ||
|---|---|---|---|---|
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 43,525 | $ | 41,712 |
| Amounts due from related parties | 2,687 | 1,141 | ||
| Inventories | 2,292 | 2,443 | ||
| Derivative assets | 920 | 4,621 | ||
| Other current assets | 3,386 | 2,462 | ||
| Total current assets | 52,810 | 52,379 | ||
| Long-term assets: | ||||
| Vessels, net of accumulated depreciation | 1,677,488 | 1,767,080 | ||
| Right-of-use assets(1) | 1,799 | — | ||
| Intangible assets, net | 1,286 | 1,891 | ||
| Derivative assets | 648 | 11,667 | ||
| Accrued income | 3,976 | 3,807 | ||
| Total Long-term assets | 1,685,197 | 1,784,445 | ||
| Total assets | $ | 1,738,007 | $ | 1,836,824 |
| LIABILITIES AND EQUITY | ||||
| Current liabilities: | ||||
| Trade accounts payable | $ | 2,730 | $ | 4,800 |
| Accrued expenses | 6,617 | 6,464 | ||
| Current portion of long-term debt | 83,453 | 106,926 | ||
| Current lease liabilities(1) | 572 | — | ||
| Current portion of derivative liabilities | 910 | 1,740 | ||
| Income taxes payable | 98 | 130 | ||
| Current portion of contract liabilities | 1,518 | 1,518 | ||
| Prepaid charter | 6,892 | 5,771 | ||
| Amount due to related parties | 1,212 | 1,070 | ||
| Total current liabilities | 104,002 | 128,419 | ||
| Long-term liabilities: | ||||
| Long-term debt | 911,943 | 970,365 | ||
| Lease liabilities(1) | 1,227 | — | ||
| Derivative liabilities | 5,133 | 345 | ||
| Contract liabilities | 3,685 | 5,203 | ||
| Deferred tax liabilities | 357 | 453 | ||
| Total long-term liabilities | 922,345 | 976,366 | ||
| Total liabilities | 1,026,347 | 1,104,785 | ||
| Commitments and contingencies | ||||
| Series A Convertible Preferred Units | 89,264 | 89,264 | ||
| Equity: | ||||
| Partners’ capital: | ||||
| Common unitholders | 611,241 | 631,244 | ||
| General partner interest | 11,155 | 11,531 | ||
| Total partners’ capital | 622,396 | 642,775 | ||
| Total liabilities and equity | $ | 1,738,007 | $ | 1,836,824 |
(1) In July 2018 the Financial Accounting Standards Board (the “FASB”) issued targeted improvements to the leasing guidance allowing for an optional transition method that allow entities to initially apply the new lease standard and its disclosures at the transition date and recognize as cumulative-effect adjustments to the opening balance of retained earnings. The Partnership adopted the new leasing standard on January 1, 2019.
7
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
| **** | Partners’ Capital | **** | **** | **** | **** | **** | **** | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars in thousands) | Common Units | **** | General Partner Units | **** | Accumulated Other Comprehensive Income (Loss) | Total Partners’ Capital | **** | Series A Convertible Preferred Units | **** | |||||
| Consolidated balance at December 31, 2016 | $ | 511,413 | $ | 10,297 | $ | — | $ | 521,710 | $ | — | ||||
| Net income | 61,651 | 1,160 | — | 62,811 | 5,253 | |||||||||
| Cash distributions | (64,307 | ) | (1,210 | ) | — | (65,517 | ) | (3,453 | ) | |||||
| Net proceeds from issuance of common units | 119,714 | 1,232 | — | 120,946 | — | |||||||||
| Net proceeds from sale of Series A Convertible Preferred Units | — | — | — | — | 87,464 | |||||||||
| Consolidated balance at December 31, 2017 | $ | 628,471 | $ | 11,479 | $ | — | $ | 639,950 | $ | 89,264 | ||||
| Net income | 73,581 | 1,384 | — | 74,965 | 7,200 | |||||||||
| Cash distributions | (70,804 | ) | (1,332 | ) | — | (72,136 | ) | (7,200 | ) | |||||
| Net proceeds from issuance of common units | (4 | ) | — | — | (4 | ) | — | |||||||
| Consolidated balance at December 31, 2018 | 631,244 | 11,531 | — | 642,775 | 89,264 | |||||||||
| Net income | 50,801 | 956 | — | 51,757 | 7,200 | |||||||||
| Cash distributions | (70,804 | ) | (1,332 | ) | — | (72,136 | ) | (7,200 | ) | |||||
| Consolidated balance at December 31, 2019 | $ | 611,241 | 11,155 | — | 622,396 | 89,264 |
8
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
| **** | Year Ended December 31, | **** | ||||
|---|---|---|---|---|---|---|
| (U.S. Dollars in thousands) | 2019 | **** | 2018 | **** | ||
| OPERATING ACTIVITIES | ||||||
| Net income | $ | 58,957 | $ | 82,165 | ||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||
| Depreciation | 89,844 | 88,756 | ||||
| Amortization of contract intangibles / liabilities | (912 | ) | (912 | ) | ||
| Amortization of deferred revenue | — | (1,056 | ) | |||
| Amortization of deferred debt issuance cost | 2,617 | 3,188 | ||||
| Drydocking expenditure | (252 | ) | (12,421 | ) | ||
| Income tax expense | 9 | (2 | ) | |||
| Income taxes paid | (132 | ) | (190 | ) | ||
| Unrealized (gain) loss on derivative instruments | 18,676 | (2,076 | ) | |||
| Unrealized (gain) loss on foreign currency transactions | 44 | 45 | ||||
| Changes in operating assets and liabilities: | ||||||
| Decrease (increase) in amounts due from related parties | (1,547 | ) | (49 | ) | ||
| Decrease (increase) in inventories | 152 | 55 | ||||
| Decrease (increase) in other current assets | (912 | ) | 3,256 | |||
| Decrease (increase) in accrued revenue | (168 | ) | (2,114 | ) | ||
| Increase (decrease) in trade accounts payable | (2,100 | ) | (1,297 | ) | ||
| Increase (decrease) in accrued expenses | 153 | (1,052 | ) | |||
| Increase (decrease) prepaid charter | 1,121 | (3,154 | ) | |||
| Increase (decrease) in amounts due to related parties | 142 | (4,496 | ) | |||
| Net cash provided by operating activities | 165,692 | 148,646 | ||||
| INVESTING ACTIVITIES | ||||||
| Disposals (additions) to vessel and equipment | — | (117 | ) | |||
| Acquisition of Anna Knutsen (net of cash acquired) | — | (15,376 | ) | |||
| Net cash (used in) investing activities | — | (15,493 | ) | |||
| FINANCING ACTIVITIES | ||||||
| Proceeds from long-term debt | — | 497,779 | ||||
| Repayment of long-term debt | (84,534 | ) | (527,979 | ) | ||
| Repayment of long-term debt from related parties | — | (22,535 | ) | |||
| Payment of debt issuance cost | 21 | (5,301 | ) | |||
| Cash distributions | (79,336 | ) | (79,336 | ) | ||
| Net proceeds from issuance of common units | — | (4) | ||||
| Net cash (used in) financing activities | (163,849 | ) | (137,376 | ) | ||
| Effect of exchange rate changes on cash | (30 | ) | (169 | ) | ||
| Net increase (decrease) in cash and cash equivalents | 1,813 | (4,392 | ) | |||
| Cash and cash equivalents at the beginning of the period | 41,712 | 46,104 | ||||
| Cash and cash equivalents at the end of the period | $ | 43,525 | $ | 41,712 |
9
APPENDIX A—RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Distributable Cash Flow (“DCF”)
Distributable cash flow represents net income adjusted for depreciation, unrealized gains and losses from derivatives, unrealized foreign exchange gains and losses, distributions on the Series A Convertible Preferred Units, 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, the Partnership’s capital assets. The Partnership believes distributable cash flow is an important measure of operating performance used by management and investors in publicly-traded partnerships to compare cash generating performance of the Partnership from period to period and to compare the cash generating performance for specific periods to the cash distributions (if any) that are expected to be paid to the common unitholders, the Partnership’s general partner and the holder of the incentive distribution rights. 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.
| (U.S. Dollars in thousands) | Three Months Ended December 31 2019 (unaudited) | **** | Three Months Ended September 30, 2019 (unaudited) | **** | ||
|---|---|---|---|---|---|---|
| Net income | $ | 23,764 | $ | 14,148 | ||
| Add: | ||||||
| Depreciation | 22,554 | 22,430 | ||||
| Other non-cash items; amortization of deferred debt issuance cost | 647 | 656 | ||||
| Other non-cash items; accrued income | 200 | 199 | ||||
| Unrealized losses from interest rate derivatives and foreign exchange currency contracts | — | 6,512 | ||||
| Less: | ||||||
| Estimated maintenance and replacement capital expenditures (including drydocking reserve) | (13,879 | ) | (13,879 | ) | ||
| Distribution to Series A Preferred Units | (1,800 | ) | (1,800 | ) | ||
| Other non-cash items; deferred revenue | (228 | ) | (228 | ) | ||
| Unrealized gains from interest rate derivatives and foreign exchange currency contracts | (4,883 | ) | — | |||
| Distributable cash flow | $ | 26,375 | $ | 28,038 | ||
| Distributions declared | $ | 18,034 | $ | 18,034 | ||
| Distribution coverage ratio (1) | 1.46 | 1.55 |
(1) Distribution coverage ratio is equal to distributable cash flow divided by distributions declared for the period presented.
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EBITDA and Adjusted EBITDA
EBITDA is defined as earnings before interest, depreciation and taxes. Adjusted EBITDA refers to earnings before interest, depreciation, taxes and other financial items (including other finance expenses, realized and unrealized gain (loss) on derivative instruments and net gain (loss) on foreign currency transactions). EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as the Partnership’s lenders, to assess its financial and operating performance and compliance with the financial covenants and restrictions contained in its financing agreements. Adjusted EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess the Partnership’s financial and operating performance. The Partnership believes that EBITDA and Adjusted EBITDA assist 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 EBITDA and 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, as applicable, 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 EBITDA and Adjusted EBITDA as financial measures 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. EBITDA and Adjusted EBITDA are non-GAAP financial measures and should not be considered as alternatives to net income or any other indicator of Partnership performance calculated in accordance with GAAP.
The table below reconciles EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure.
| (U.S. Dollars in thousands) | Three Months Ended December 31, 2019 (unaudited) | **** | Three Months Ended September 30, 2019 (unaudited) | **** | ||
|---|---|---|---|---|---|---|
| Net income | $ | 23,764 | $ | 14,148 | ||
| Interest income | (169 | ) | (225 | ) | ||
| Interest expense | 11,433 | 12,459 | ||||
| Depreciation | 22,554 | 22,430 | ||||
| Income tax expense | 3 | — | ||||
| EBITDA | 57,585 | 48,812 | ||||
| Other financial items (a) | (4,010 | ) | 6,036 | |||
| Adjusted EBITDA | $ | 53,575 | $ | 54,848 |
(a) Other financial items consist of other finance expense, realized and unrealized gain (loss) on derivative instruments and net gain (loss) on foreign currency transactions.
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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. Forward-looking statements include statements with respect to, among other things:
· market trends in the shuttle tanker or general tanker industries, including hire rates, factors affecting supply and demand, and opportunities for the profitable operations of shuttle tankers;
· Knutsen NYK’s and KNOT Offshore Partners’ ability to build shuttle tankers and the timing of the delivery and acceptance of any such vessels by their respective charterers;
· forecasts of KNOT Offshore Partners’ ability to make or increase distributions on its common units and to make distributions on its Series A Convertible Preferred Units and the amount of any such distributions;
· KNOT Offshore Partners’ ability to integrate and realize the expected benefits from acquisitions;
· KNOT Offshore Partners’ anticipated growth strategies;
· the effects of a worldwide or regional economic slowdown;
· turmoil in the global financial markets;
· fluctuations in currencies and interest rates;
· fluctuations in the price of oil;
· the length and severity of the recent outbreak of Coronavirus, including its impact on our business;
· general market conditions, including fluctuations in hire rates and vessel values;
· changes in KNOT Offshore Partners’ operating expenses, including drydocking and insurance costs and bunker prices;
· 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 Knutsen NYK’s relationships and reputation in the shipping industry;
· KNOT Offshore Partners’ ability to purchase vessels from Knutsen NYK in the future;
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· KNOT Offshore Partners’ continued ability to enter into long-term charters, which KNOT Offshore Partners defines as charters of five years or more;
· KNOT Offshore Partners’ ability to maximize the use of its vessels, including the re-deployment or disposition of vessels no longer under long-term charter;
· the financial condition of KNOT Offshore Partners’ existing or future customers and their ability to fulfill their charter obligations;
· timely purchases and deliveries of newbuilds;
· future purchase prices of newbuilds and secondhand vessels;
· any impairment of the value of KNOT Offshore Partners’ vessels;
· KNOT Offshore Partners’ ability to compete successfully for future chartering and newbuild 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, including the availability and cost of low sulfur fuel oil compliant with the International Maritime Organization sulfur emission limit reductions generally referred to as “IMO 2020” that took effect January 1, 2020;
· availability of skilled labor, vessel crews and management;
· KNOT Offshore Partners’ general and administrative expenses and its fees and expenses payable under the technical management agreements, the management and administration agreements and the administrative services agreement;
· the anticipated taxation of KNOT Offshore Partners and distributions to its unitholders;
· estimated future maintenance and replacement capital expenditures;
· Marshall Islands economic substance requirements;
· 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 U.S Securities and Exchange Commission, including its Annual Report on Form 20-F for the year ended December 31, 2018 and subsequent annual reports on Form 20-F and reports on Form 6-K.
All forward-looking statements included in this release are made only as of the date of this release. 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.
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