KNOT Offshore
Partners LP (the “Partnership”) is a publicly traded Marshall Islands limited partnership initially formed for the purpose of acquiring 100% ownership interests in four shuttle tankers owned by Knutsen NYK Offshore Tankers AS
(“KNOT”) in connection with the Partnership’s initial public offering of common units (the “IPO”), which was completed in April 2013.
As of June 30, 2017, the Partnership had a fleet of thirteen shuttle tankers, the
Windsor Knutsen
, the
Bodil Knutsen
, the
Recife Knutsen
, the
Fortaleza Knutsen
, the
Carmen Knutsen,
the
Hilda Knutsen,
the
Torill Knutsen
, the
Dan Cisne
, the
Dan Sabia
, the
Ingrid Knutsen
, the
Raquel Knutsen,
the
Tordis
Knutsen
and the
Vigdis Knutsen,
each referred to as a “Vessel” and, collectively, as the “Vessels.” The Vessels operate under fixed charter contracts to charterers.
The initial term for a time charter or bareboat charter commences upon the vessel’s delivery to the customer. The Partnership’s
charters include options, exercisable by the customer, to extend the charter’s initial term. Pursuant to the Omnibus Agreement, KNOT has agreed to guarantee the payments of the hire rate under the initial charters for the
Windsor Knutsen
and the
Bodil
Knutsen
for five years from the closing of the Partnership’s IPO. The time charter for the
Windsor Knutsen
expires in 2018 and the charterer has five
one-year
extension
options. The time charter for the
Bodil Knutsen
expires in 2019 and contains customer options for extension through 2024. The
Recife Knutsen
and the
Fortaleza Knutsen
are under bareboat charter contracts that expire in 2023. The
time charter for the
Carmen Knutsen
expires in 2023 and contains customer options for extension through 2026. The time charters for the
Hilda Knutsen
and the
Torill Knutsen
each expire in 2018 and contain a customer option for
extension through 2023. The
Dan Cisne
and the
Dan Sabia
are under bareboat charter contracts that expire in 2023 and 2024, respectively. The time charter for the
Ingrid Knutsen
expires in 2024 and contains customer options for
extension through 2029. The time charter for the
Raquel Knutsen
expires in 2025 and contains customer options for extension through 2030. The time charter for the
Tordis Knutsen
expires in 2022 and contains customer options for
extension through 2032. The time charter for the
Vigdis Knutsen
expires in 2022 and contains customer options for extension through 2032.
Under the Partnership’s Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), KNOT Offshore
Partners GP LLC, a wholly owned subsidiary of KNOT, and the general partner of the Partnership (the “General Partner”), has irrevocably delegated to the Partnership’s board of directors the power to oversee and direct the operations
of, manage and determine the strategies and policies of the Partnership. During the period from the Partnership’s IPO in April 2013 until the time of the Partnership’s first annual general meeting (“AGM”) on June 25, 2013,
the General Partner retained the sole power to appoint, remove and replace all members of the Partnership’s board of directors. From the first AGM, four of the seven board members became electable by the common unitholders and accordingly, from
this date, KNOT, as the owner of the General Partner, no longer retains the power to control the Partnership’s board of directors and, hence, the Partnership. As a result, the Partnership is no longer considered to be under common control with
KNOT and as a consequence, the Partnership will not account for any vessel acquisitions from KNOT after June 25, 2013 as a transfer of equity interests between entities under common control.
On January 10, 2017, the Partnership issued and sold 2,500,000 common units in an underwritten public offering (see Note 16(a) —
Equity Offering), raising approximately $54.9 million in net proceeds.
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. After deducting estimated fees and expenses, the net proceeds from the sale were approximately
$48.6 million.
On March 1, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT Shuttle
Tankers 24 AS, the company that owns the
Tordis Knutsen
, from KNOT. The acquisition of the
Tordis Knutsen
was accounted for as an acquisition of a business. As a result, the Partnership has recorded the results of operations of the
Tordis Knutsen
in its consolidated statement of operations from March 1, 2017. See Note 15—Business Acquisitions.
On
June 1, 2017, KNOT Shuttle Tankers AS acquired KNOT Shuttle Tankers 25 AS, the company that owns the
Vigdis Knutsen
, from KNOT. The acquisition of the
Vigdis Knutsen
was accounted for as an acquisition of a business. As a result,
the Partnership has recorded the results of operations of the
Vigdis Knutsen
in its consolidated statement of operations from June 1, 2017. See Note 15—Business Acquisitions.
On June 30, 2017, the Partnership issued and sold in a second private placement 1,666,667 additional Series A Preferred Units at a price
of $24.00 per unit. After deducting estimated fees and expenses, the net proceeds from the sale were approximately $38.8 million.
The
accompanying unaudited condensed consolidated interim financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the
U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of management of the Partnership, all adjustments considered necessary for a fair presentation, which are of normal recurring nature,
have been included. All intercompany balances and transactions are eliminated. The unaudited condensed consolidated financial statements do not include all the disclosures and information required for a complete set of annual financial statements;
and, therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2016, which are included in the
Partnership’s Annual Report on
Form 20-F
(the “2016
20-F”).
The accounting policies adopted in the preparation of the unaudited condensed consolidated interim financial statements are consistent with
those followed in the preparation of the Partnership’s audited consolidated financial statements for the year ended December 31, 2016, as contained in the Partnership’s 2016
20-F.
There are no accounting pronouncements effective for the period, whose adoption had a material impact on the consolidated financial statements
in the current period.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued revised guidance for leasing. The objective is to
establish the principles that lessors and lessees shall apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The standard is effective for annual periods
beginning after December 15, 2018. The Partnership is currently assessing the impact the adoption of this standard will have on the consolidated financial statements.
Any other accounting pronouncements yet to be adopted by the Partnership are consistent with those disclosed in the Partnership’s audited
consolidated financial statements for the year ended December 31, 2016.
The Partnership has not presented segment information as it considers its operations to occur in one reportable segment, the shuttle tanker
market. As of June 30, 2017, the Partnership’s fleet consisted of thirteen vessels and operated under nine time charters and four bareboat charters. As of June 30, 2016, the Partnership’s fleet consisted of ten vessels and
operated under six time charters and four bareboat charters. Under the time charters and bareboat charters, the charterer, not the Partnership, controls the choice of which trading areas the applicable Vessel will serve. Accordingly, the
Partnership’s management, including the chief operating decision makers, does not evaluate performance according to geographical region.
The following table presents revenues and percentages of consolidated revenues for customers that
accounted for more than 10% of the Partnership’s consolidated revenues during the three and six months ended June 30, 2017 and 2016. All of these customers are subsidiaries of major international oil companies.
In addition, for the three and six months ended June 30,
2017, the Partnership recorded $2.17 million and $3.89 million, respectively, for recoveries up to the amount of loss under hull and machinery insurance for the repairs as a result of the propeller hub damage to the
Raquel Knutsen
.
For the three and six months ended June 30, 2017, $0.1 million and $0.1 million, respectively, is classified under vessel operating expense along with the cost of the repairs.
A reconciliation of total interest cost and interest expense as reported in the consolidated statements of operations for the
three and six months ended June 30, 2017 and 2016:
The following table presents the other finance expense for three and six months ended June 30, 2017 and 2016:
The unaudited condensed consolidated interim financial statements include the results of interest rate swap contracts to manage the
Partnership’s exposure related to changes in interest rates on its variable rate debt instruments and the results of foreign exchange forward contracts to manage its exposure related to changes in currency exchange rates on its operating
expenses, mainly crew expenses, in currency other than U.S. Dollars and on its contract obligations. The Partnership does not apply hedge accounting for derivative instruments. The Partnership does not speculate using derivative instruments.
By using derivative financial instruments to economically hedge exposures to changes in interest rates, the Partnership exposes itself to
credit risk and market risk. Derivative instruments that economically hedge exposures are used for risk management purposes, but these instruments are not designated as hedges for accounting purposes. Credit risk is the failure of the counterparty
to perform under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty owes the Partnership, which creates credit risk for the Partnership. When the fair value of a derivative instrument
is negative, the Partnership owes the counterparty, and, therefore, the Partnership is not exposed to the counterparty’s credit risk in those circumstances. The Partnership minimizes counterparty credit risk in derivative instruments by
entering into transactions with major banking and financial institutions. The derivative instruments entered into by the Partnership do not contain credit risk-related contingent features. The Partnership has not entered into master netting
agreements with the counterparties to its derivative financial instrument contracts.
Market risk is the adverse effect on the value of a
derivative instrument that results from a change in interest rates, currency exchange rates or commodity prices. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and
degree of market risk that may be undertaken.
The Partnership assesses interest rate risk by monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating economical hedging opportunities.
The Partnership’s
variable interest rate mortgage debt obligations expose the Partnership to variability in interest payments due to changes in interest rates. The Partnership believes that it is prudent to limit the variability of a portion of its interest payments.
To meet this objective, the Partnership has entered into London Interbank Offered Rate (“LIBOR”)-based interest rate swap contracts to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These
swaps change the variable rate cash flow exposure on the mortgage debt obligations to fixed cash flows. Under the terms of the interest rate swap contracts, the Partnership receives LIBOR-based variable interest rate payments and makes fixed
interest rate payments, thereby creating the equivalent of fixed rate debt for the notional amount of its debt hedged.
As of
June 30, 2017, the Partnership had entered into various interest swap agreements for a total notional amount of $536.7 million to hedge against the interest rate risks of its variable rate borrowings. Under the terms of the interest rate
swap agreements, the Partnership receives interest based on three or six month LIBOR and pays a weighted average interest rate of 1.65%.
As of June 30, 2017 and December 31, 2016, the total notional amount of the Partnership’s outstanding interest rate swap
contracts that were entered into in order to hedge outstanding or forecasted debt obligations were $536.7 million and $446.7 million, respectively. As of June 30, 2017 and December 31, 2016, the carrying amount of the interest
rate swaps contracts were net assets of $2.1 million and $0.8 million, respectively. See Note 7—Fair Value Measurements.
Changes in the fair value of interest rate swap contracts are reported in realized and unrealized gain (loss) on derivative instruments in the
same period in which the related interest affects earnings.
The Partnership and its subsidiaries utilize the U.S. Dollar as their
functional and reporting currency, because all of their revenues and the majority of their expenditures, including the majority of their investments in vessels and their financing transactions, are denominated in U.S. Dollars. Payment obligations in
currencies other than the U.S. Dollar, and in particular operating expenses in Norwegian Kroner (NOK), expose the Partnership to variability in currency exchange rates. The Partnership believes that it is prudent to limit the variability of a
portion of its currency exchange exposure. To meet this objective, the Partnership entered into foreign exchange forward contracts to manage fluctuations in cash flows resulting from changes in the exchange rates towards the U.S. Dollar. The
agreements change the variable exchange rate to fixed exchange rates at agreed dates.
As of June 30, 2017 and December 31,
2016, the total contract amount in foreign currency of the Partnership’s outstanding foreign exchange forward contracts that were entered into to economically hedge outstanding future payments in currencies other than the U.S. Dollar were
NOK 332.5 million and NOK 290.1 million, respectively. As of June 30, 2017 and December 31, 2016, the carrying amount of the Partnership’s foreign exchange forward contracts was a net liability of $0.2 million and
$1.3 million, respectively. See Note 7—Fair Value Measurements.
The following table presents the realized and unrealized gains and losses that are recognized in
earnings as net gain (loss) for derivative instruments for the three and six months ended June 30, 2017 and 2016:
The following table presents the carrying amounts and estimated fair values of the Partnership’s financial instruments as of June 30,
2017 and December 31, 2016. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The carrying amounts shown in the table above are included in the condensed consolidated balance
sheets under the indicated captions. The carrying value of trade accounts receivable, trade accounts payable and receivables/payables to owners and affiliates approximate their fair value.
The fair values of the financial instruments shown in the above table as of June 30, 2017 and December 31, 2016 represent the
amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However,
in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Partnership’s own judgment about the assumptions that market participants would use in
pricing the asset or liability. Those judgments are developed by the Partnership based on the best information available in the circumstances, including expected cash flows, appropriately risk-adjusted discount rates and available observable and
unobservable inputs.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring
basis (including items that are required to be measured at fair value or for which fair value is required to be disclosed) as of June 30, 2017 and December 31, 2016:
The Partnership’s accounting policy is to recognize transfers between levels of the fair value hierarchy
on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2 or Level 3 as of June 30, 2017 and December 31, 2016.
The Norwegian government
is in negotiations with the EFTA Surveillance Authority to extend the effective date of the Norwegian Tonnage Tax regime (the “NTT”). Pursuant to those negotiations, Norway has proposed restrictions that would eliminate the ability of
companies that own vessels under certain bareboat charters to qualify for the NTT. Companies that no longer qualify for the NTT would instead be subject to Norwegian corporate income tax.
Subsidiaries of the Partnership collectively own four vessels under bareboat charters. Under the currently proposed changes to the NTT,
the subsidiaries that own those vessels would no longer qualify for the NTT and would instead be subject to Norwegian corporate income tax, potentially as of January 1, 2018. The Partnership is evaluating potential alternatives that would avoid
any of its subsidiaries being disqualified from the NTT. However, until any changes to the NTT are finalized, the Partnership can make no assurances that it can avoid the disqualification of certain of its subsidiaries from the NTT.
After the reorganization of the Partnership’s predecessor’s activities into the new group structure in February 2013, all profit from
continuing operations in Norway is taxable within the Norwegian Tonnage Tax regime (“the tonnage tax regime”). The consequence of the reorganization was a
one-time
entrance tax into the tonnage tax
regime due to the Partnership’s acquisition of the shares in the subsidiary that owns the
Fortaleza Knutsen
and the
Recife Knutsen
. Under the tonnage tax regime, the tax is based on the tonnage of the vessel and operating income
is tax free. The net financial income and expense remains taxable as ordinary income tax for entities subject to the tonnage tax regime. For the portion of activities subject to the tonnage tax regime, tonnage taxes are classified as vessel
operating expenses while the current and deferred taxes arising on net financial income and expense are reflected as income tax expense in the consolidated financial statements.
The total amount of the entrance tax was estimated to be approximately $3.0 million, which
was recognized in the three months ended March 31, 2013. The entrance tax is payable over several years and is calculated by multiplying the tax rate by the declining balance of the gain, which will decline by 20% each year. The amount payable
will be affected by the change in tax rate which was reduced to 24% in 2017 from 25% in 2016, from 27% in 2014 and from 28% in 2013 and the fluctuation in currency rates. Approximately $0.2 and $0.1 million of the entrance tax was paid during
the first and second quarter of 2017, respectively, and $0.2 million was paid during the first quarter of 2016. UK income tax is presented as income taxes payable, while $0.7 million is presented as
non-current
deferred taxes payable.
Significant components of current and deferred income tax
expense attributable to income from continuing operations for the three and six months ended June 30, 2017 and 2016 as follows:
The Partnership records a valuation allowance for deferred tax assets when it is more likely than not that
some of or all of the benefit from the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, which relates to financial loss carry forwards and other deferred tax assets within the tonnage tax regime, the
Partnership considers whether it is
more-likely-than-not
that some portion or all of the deferred tax assets will not be realized taking into account all the positive and negative evidence available. As of
June 30, 2017 and December 31, 2016 there are no deferred tax assets recognized.
As of June 30, 2017 and December 2016, Vessels with a book value of $1,519 million and
$1,257 million, respectively, are pledged as security held as a guarantee for the Partnership’s long-term debt. See Note 11—Long-term debt.
The intangible for the above market value of time charter contract associated with the
Tordis Knutsen
is amortized to time charter revenue on a straight line basis over the remaining term of the contract of approximately 4.8 years as of the acquisition date. The intangible for the above market value of time charter contract associated with the
Vigdis Knutsen
is amortized to time charter revenue on a straight line basis over the remaining term of the contract of approximately 4.9 years as of the acquisition date. Also see Note 15 – Business Acquisitions.
11) Long-Term Debt
As of June 30, 2017 and December 31, 2016, the Partnership had the following debt amounts outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Vessel
|
|
June 30, 2017
|
|
|
December 31,
2016
|
|
|
$220 million loan facility
|
|
Windsor Knutsen, Bodil Knutsen,
Carmen Knutsen
|
|
$
|
172,857
|
|
|
$
|
180,714
|
|
|
$35 million revolving credit facility
|
|
Windsor Knutsen, Bodil
Knutsen, Carmen Knutsen
|
|
|
30,000
|
|
|
|
25,000
|
|
|
$140 million loan facility
|
|
Fortaleza Knutsen &
Recife Knutsen
|
|
|
113,750
|
|
|
|
118,125
|
|
|
$117 million loan facility
|
|
Hilda Knutsen
|
|
|
—
|
|
|
|
76,871
|
|
|
$117 million loan facility
|
|
Torill Knutsen
|
|
|
75,641
|
|
|
|
78,105
|
|
|
$172.5 million loan facility
|
|
Dan Cisne, Dan Sabia
|
|
|
95,939
|
|
|
|
100,539
|
|
|
$77.5 million loan facility
|
|
Ingrid Knutsen
|
|
|
64,368
|
|
|
|
67,652
|
|
|
$74.5 million loan facility
|
|
Raquel Knutsen
|
|
|
71,028
|
|
|
|
73,643
|
|
|
$25 million Seller’s Credit and Seller’s Loan
|
|
Raquel Knutsen
|
|
|
—
|
|
|
|
25,000
|
|
|
$114.4 million loan facility
|
|
Tordis Knutsen
|
|
|
93,581
|
|
|
|
—
|
|
|
$114.4 million loan facility
|
|
Vigdis Knutsen
|
|
|
94,846
|
|
|
|
—
|
|
|
$100 million loan facility
|
|
Hilda Knutsen
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
912,010
|
|
|
|
745,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current installments
|
|
|
|
|
66,661
|
|
|
|
60,314
|
|
|
Less: unamortized deferred loan issuance costs
|
|
|
|
|
1,643
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
65,018
|
|
|
|
58,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due after one year
|
|
|
|
|
845,350
|
|
|
|
685,335
|
|
|
Less: unamortized deferred loan issuance costs
|
|
|
|
|
4,468
|
|
|
|
2,673
|
|
|
Less: $25 million Seller’s Credit and Seller’s Loan
|
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current installments, Seller’s Credit and
Seller’s Loan and unamortized deferred loan issuance costs
|
|
$
|
840,882
|
|
|
|
657,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Partnership’s outstanding debt of $912.0 million as of June 30, 2017 is repayable as
follows:
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Period
repayment
|
|
|
Balloon
repayment
|
|
|
Remainder of 2017
|
|
$
|
33,331
|
|
|
$
|
—
|
|
|
2018
|
|
|
66,303
|
|
|
|
86,677
|
|
|
2019
|
|
|
50,085
|
|
|
|
267,678
|
|
|
2020
|
|
|
39,153
|
|
|
|
—
|
|
|
2021
|
|
|
39,753
|
|
|
|
70,811
|
|
|
2022 and thereafter
|
|
|
85,507
|
|
|
|
172,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
314,132
|
|
|
$
|
597,878
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017, the interest rates on the Partnership’s loan agreements (other than tranche two
of the $77.5 million loan facility) were the London Interbank Offered Rate (“LIBOR”) plus a fixed margin ranging from 1.9% to 2.5%. On the export credit loan of $44.6 million which is tranche two of the $77.5 million loan
facility secured by the
Ingrid Knutsen
, the annual rate is 3.85% composed of a 2.5% bank facility rate plus a commission of 1.35% to the export credit guarantor. The guarantee commission of 1.35% is classified as other finance expense.
16
In April 2015, KNOT Shuttle Tankers 24 AS, the subsidiary owning the
Tordis Knutsen
, as
the borrower, entered into a secured loan facility (the “Tordis Facility”). As of the time of the acquisition of the
Tordis Knutsen
on March 1, 2017, the aggregate amount outstanding under the facility was $114.4 million.
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%. The facility
is secured by a vessel mortgage on the
Tordis Knutsen
. The
Tordis Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Tordis Facility. The Partnership and KNOT Shuttle
Tankers AS are the sole guarantors.
In April 2015, KNOT Shuttle Tankers 25 AS, the subsidiary owning the
Vigdis Knutsen
, as the
borrower, entered into a secured loan facility (the “Vigdis Facility”). As of the time of the acquisition of the
Vigdis Knutsen
on June 1, 2017, the aggregate amount outstanding under the facility was $114.4 million. The
Vigdis Facility is repayable in quarterly installments with a final balloon payment of $70.8 million due at maturity in February 2022. The Vigdis Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.9%. The facility is
secured by a vessel mortgage on the
Vigdis Knutsen
. The
Vigdis Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Vigdis Facility. The Partnership and KNOT Shuttle Tankers
AS are the sole guarantors.
On May 26, 2017, the Partnership’s subsidiary, KNOT Shuttle Tankers 14 AS, which owns the vessel
Hilda Knutsen
, entered into a new $100 million senior secured term loan facility with Mitsubishi UFJ Lease & Finance (Hong Kong) Limited (the “New Hilda Facility”). The New Hilda Facility is repayable in twenty-eight
(28) consecutive quarterly installments with a balloon payment of $58.5 million due at maturity. The New Hilda Facility bears 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 and refinanced the $117 million loan facility associated with the
Hilda Knutsen
that bore interest at a rate of LIBOR plus 2.5% and was due to be paid in full in August 2018. As part of the refinancing, the
$117 million loan facility including amortized loan expenses has been fully derecognized.
12) Related Party Transactions
(a) Related Parties
Net expenses
(income) from related parties included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee income from KNOT (1)
|
|
|
593
|
|
|
|
192
|
|
|
|
687
|
|
|
|
381
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical and operational management fee from KNOT Management to Vessels (2)
|
|
|
1,079
|
|
|
|
733
|
|
|
|
2,028
|
|
|
|
1,465
|
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration fee from KNOT Management (3)
|
|
|
430
|
|
|
|
259
|
|
|
|
783
|
|
|
|
633
|
|
|
Administration fee from KOAS (3)
|
|
|
111
|
|
|
|
100
|
|
|
|
223
|
|
|
|
191
|
|
|
Administration fee from KOAS UK (3)
|
|
|
31
|
|
|
|
35
|
|
|
|
62
|
|
|
|
71
|
|
|
Administration and management fee from KNOT (4)
|
|
|
52
|
|
|
|
51
|
|
|
|
94
|
|
|
|
102
|
|
|
Finance income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense charged from KNOT (5)
|
|
|
—
|
|
|
|
—
|
|
|
|
52
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,110
|
|
|
$
|
986
|
|
|
$
|
2,555
|
|
|
$
|
2,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
|
|
|
At June 30,
2017
|
|
|
|
|
|
At December 31,
2016
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drydocking supervision fee from KNOT (6)
|
|
|
|
|
|
$
|
29
|
|
|
|
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
Drydocking supervision fee from KOAS (6)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
29
|
|
|
|
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Guarantee income from KNOT
: Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charter of the
Windsor Knutsen
and
Bodil Knutsen
for a period
of five years from the closing date of the IPO. In October 2015, the
Windsor Knutsen
commenced on a new Shell time charter with a hire rate below the hire rate in the initial charter. The difference between the new hire rate and the initial
rate is paid by KNOT. See Note 12(b)—Related Party Transactions—Guarantees and Indemnifications. The
Vigdis Knutsen
suffered damages to its hull in connection with a
ship-to-ship
loading on May 24, 2017 and the vessel went offhire 6 days in June 2017 due to repairs of the damage. In connection with the
Vigdis Knutsen
acquisition KNOT agreed to pay for the repair cost and charter hire lost in connection with the incident. The reimbursement from KNOT for lost charter hire is accounted for as guarantee income.
|
|
(2)
|
Technical and operational management fee from KNOT
Management
to Vessels
: KNOT Management AS (“KNOT Management”) provides technical and operational management of the vessels on time
charter including crewing, purchasing, maintenance and other operational services. In addition, there is also a charge for
24-hour
emergency response services provided by KNOT for all vessels managed by KNOT.
|
|
(3)
|
Administration fee from KNOT Management and Knutsen OAS Shipping AS (“KOAS”) and Knutsen OAS (UK) Ltd. (“KOAS UK”)
: Administration costs include the compensation and benefits of KNOT
Management’s management and administrative staff as well as other general and administration expenses. Some benefits are also provided by KOAS and KOAS UK. Net administration costs are total administration cost plus a 5% margin, reduced for the
total fees for services delivered by the administration staffs and the estimated shareholder costs for KNOT that have not been allocated. As such, the level of net administration costs as a basis for the allocation can vary from year to year based
on the administration and financing services offered by KNOT to all the vessels in its fleet each year. KNOT Management also charges each subsidiary a fixed annual fee for the preparation of the statutory financial statement.
|
|
(4)
|
Administration and management fee from KNOT:
For bareboat charters, the shipowner is not responsible for providing crewing or other operational services and the customer is responsible for all vessel operating
expenses and voyage expenses. However, each of the vessels under bareboat charters are subject to management and administration agreements with either KNOT Management or KNOT Management Denmark, pursuant to which these companies provide general
monitoring services for the vessels in exchange for an annual fee.
|
|
(5)
|
Interest expense charged from KNOT:
KNOT
invoiced interest (expense) income for any outstanding payables to (receivable from) owners and affiliates to the vessel-owning subsidiaries.
|
|
(6)
|
Drydocking supervision fee from KNOT and KOAS
: KNOT and KOAS provide supervision and hire out service personnel during drydocking of the vessels. The fee is calculated as a daily fixed fee.
|
(b) Guarantees and Indemnifications
Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charters of each of the
Windsor
Knutsen
and the
Bodil Knutsen
for a period of five years from the closing date of the IPO.
In April 2014, the Partnership was
notified that Shell would not exercise its option to extend the
Windsor Knutsen
time charter after the expiration of its initial term. The vessel was
re-delivered
on July 28, 2014. In order to
comply with its obligations under the Omnibus Agreement, on July 29, 2014, KNOT and the Partnership entered into a time charter for the vessel at a rate of hire that would have been in effect during the option period under the previous Shell
time charter. This charter was effective until the new Shell time charter commenced in October, 2015. The new Shell charter has a hire rate that is lower than the hire rate in the initial charter. The difference between the new hire and the initial
rate is paid by KNOT.
Under the Omnibus Agreement, KNOT has agreed to indemnify the Partnership until April 15, 2018, against
certain environmental and toxic tort liabilities with respect to certain assets that KNOT contributed or sold to the Partnership to the extent arising prior to the time they were contributed or sold. However, claims are subject to a deductible of
$0.5 million and an aggregate cap of $5 million.
(c) Transactions with Management and Directors
See the footnotes to Note 12(a)—Related Party Transactions for a discussion of the allocation principles for KNOT’s administrative
costs, including management and administrative staff, included in the consolidated statements of operations.
18
(d) Amounts Due from (to) Related Parties
Balances with related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
At June 30,
2017
|
|
|
At December 31,
2016
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
Trading balances due from KOAS
|
|
$
|
128
|
|
|
$
|
108
|
|
|
Trading balances due from KNOT and affiliates
|
|
|
639
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due from related parties
|
|
|
767
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading balances due to KOAS
|
|
$
|
835
|
|
|
$
|
543
|
|
|
Trading balances due to KNOT and affiliates
|
|
|
6,212
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due to related parties
|
|
$
|
7,047
|
|
|
$
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from (to) related parties are unsecured and intended to be settled in the ordinary course of
business. They primarily relate to vessel management and other fees due to KNOT, KNOT Management, KOAS UK and KOAS.
(e) Trade accounts payables
Trade accounts payables to related parties are included in total trade accounts payables in the balance sheet. The balances to
related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
At June 30,
2017
|
|
|
At December 31,
2016
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
Trading balances due to KOAS
|
|
$
|
711
|
|
|
$
|
727
|
|
|
Trading balances due to KNOT and affiliates
|
|
|
877
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payables to related parties
|
|
$
|
1,588
|
|
|
$
|
1,121
|
|
(f) Long-term debt from related parties
The balances to related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
At June 30,
2017
|
|
|
At December 31,
2016
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
Long-term debt from related parties (KNOT)
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
(g) Acquisitions from KNOT
On December 1, 2016, the Partnership acquired KNOT’s 100% interest in Knutsen NYK Shuttle Tankers 19 AS, the company that owns and
operates the
Raquel Knutsen.
This acquisition was accounted for as an acquisition of a business.
On March 1, 2017, the
Partnership acquired KNOT’s 100% interest in KNOT Shuttle Tankers 24 AS, the company that owns and operates the
Tordis Knutsen.
This acquisition was accounted for as an acquisition of a business.
On June 1, 2017, the Partnership acquired KNOT’s 100% interest in KNOT Shuttle Tankers 25 AS, the company that owns and operates the
Vigdis Knutsen.
This acquisition was accounted for as an acquisition of a business.
The board of directors of the Partnership (the
“Board”) and the conflicts committee of the Board (the “Conflicts Committee”) approved the purchase price for each transaction described above. The Conflicts Committee retained a financial advisor to assist with its evaluation of
each of the transactions. See Note 15—Business Acquisitions.
19
13) Commitments and Contingencies
Assets Pledged
As
of June 30, 2017 and December 31, 2016, Vessels with a book value of $ 1,519 million and $1,257 million, respectively, were pledged as security held as guarantee for the Partnership’s long-term debt and interest rate swap
obligations. See Note 6—Derivative Instruments and Note 11—Long-Term Debt.
Claims and Legal Proceedings
From time to time, the Partnership is involved in various claims and legal actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows.
Insurance
The
Partnership maintains insurance on all the Vessels to insure against marine and war risks, which include damage to or total loss of the Vessels, subject to deductible amounts that average $0.15 million per Vessel, and loss of hire.
Under the loss of hire policies, the insurer will pay a compensation for the lost hire rate agreed in respect of each Vessel for each day, in
excess of 14 deductible days, for the time that the Vessel is out of service as a result of damage, for a maximum of 180 days. In addition, the Partnership maintains protection and indemnity insurance, which covers third-party legal liabilities
arising in connection with the Vessels’ activities, including, among other things, the injury or death of third-party persons, loss or damage to cargo, claims arising from collisions with other vessels and other damage to other third-party
property, including pollution arising from oil or other substances. This insurance is unlimited, except for pollution, which is limited to $1 billion per vessel per incident. The protection and indemnity insurance is maintained through a
protection and indemnity association, and as a member of the association, the Partnership may be required to pay amounts above budgeted premiums if the member claims exceed association reserves, subject to certain reinsured amounts. If the
Partnership experiences multiple claims each with individual deductibles, losses due to risks that are not insured or claims for insured risks that are not paid, it could have a material adverse effect on the Partnership’s results of operations
and financial condition.
20
14) Earnings per Unit and Cash Distributions
The calculations of basic and diluted earnings per unit are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
(U.S. Dollars in thousands, except per unit data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Net income
|
|
$
|
16,915
|
|
|
$
|
11,578
|
|
|
$
|
28,344
|
|
|
$
|
22,241
|
|
|
Less: Series A Preferred unitholders’ interest in net income
|
|
|
1,009
|
|
|
|
—
|
|
|
|
1,653
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the unitholders of KNOT Offshore Partners LP
|
|
|
15,906
|
|
|
|
11,578
|
|
|
|
26,691
|
|
|
|
22,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Distributions (2)
|
|
|
16,379
|
|
|
|
15,027
|
|
|
|
32,758
|
|
|
|
30,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under (over) distributed earnings
|
|
|
(473
|
)
|
|
|
(3,449
|
)
|
|
|
(6,067
|
)
|
|
|
(7,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under (over) distributed earnings attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders (3)
|
|
|
(464
|
)
|
|
|
(3,380
|
)
|
|
|
(5,955
|
)
|
|
|
(7,722
|
)
|
|
Subordinated unitholders (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
General Partner
|
|
|
(9
|
)
|
|
|
(69
|
)
|
|
|
(112
|
)
|
|
|
(159
|
)
|
|
Weighted average units outstanding (basic) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
29,694
|
|
|
|
22,581
|
|
|
|
29,570
|
|
|
|
20,604
|
|
|
Subordinated unitholders
|
|
|
—
|
|
|
|
4,613
|
|
|
|
—
|
|
|
|
6,590
|
|
|
General Partner
|
|
|
559
|
|
|
|
559
|
|
|
|
559
|
|
|
|
559
|
|
|
Weighted average units outstanding (diluted) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
31,798
|
|
|
|
22,581
|
|
|
|
31,296
|
|
|
|
20,604
|
|
|
Subordinated unitholders
|
|
|
—
|
|
|
|
4,613
|
|
|
|
—
|
|
|
|
6,590
|
|
|
General Partner
|
|
|
559
|
|
|
|
559
|
|
|
|
559
|
|
|
|
559
|
|
|
Earnings per unit (basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders (4)
|
|
$
|
0.526
|
|
|
$
|
0.502
|
|
|
$
|
0.886
|
|
|
$
|
0.810
|
|
|
Subordinated unitholders (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.767
|
|
|
General Partner
|
|
|
0.526
|
|
|
|
0.417
|
|
|
|
0.882
|
|
|
|
0.897
|
|
|
Earnings per unit (diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
$
|
0.522
|
|
|
$
|
0.502
|
|
|
$
|
0.886
|
|
|
$
|
0.810
|
|
|
Subordinated unitholders (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.767
|
|
|
General Partner
|
|
|
0.522
|
|
|
|
0.417
|
|
|
|
0.882
|
|
|
|
0.897
|
|
|
Cash distributions declared and paid in the period per unit (5)
|
|
|
0.520
|
|
|
|
0.520
|
|
|
|
1.040
|
|
|
|
1.040
|
|
|
Subsequent event: Cash distributions declared and paid per unit
relating to the period
(6)
|
|
|
0.520
|
|
|
|
0.520
|
|
|
|
0.520
|
|
|
|
0.520
|
|
|
(1)
|
Earnings per unit have been calculated in accordance with the cash distribution provisions set forth in the Partnership’s Partnership Agreement.
|
|
(2)
|
This refers to distributions made or to be made in relation to the period irrespective of the declaration and payment dates and based on the number of units outstanding at the record date. This includes cash
distributions to the IDR holder (KNOT) for the three months ended June 30, 2017 and 2016 of $0.6 million and of $0.6 million, respectively, and for the six months ended June 30, 2017 and 2016 of $1.2 million and of
$1.2 million, respectively.
|
|
(3)
|
On May 18, 2016 all subordinated units converted into common units on a
one-for-one
basis.
|
|
(4)
|
This includes the net income attributable to the IDR holder. The IDRs generally may not be transferred by KNOT until March 31, 2018. The net income attributable to IDRs for the three months ended June 30, 2017
and 2016 was $0.6 million and $0.6 million, respectively, and for the six months ended June 30, 2017 and 2016 was $1.2 million and $1.2 million, respectively.
|
|
(5)
|
Refers to cash distributions declared and paid during the period.
|
|
(6)
|
Refers to cash distributions declared and paid subsequent to the period end.
|
21
As of June 30, 2017, the Partnership had 29,694,094 common units outstanding, of which
21,036,226 are held by the public and 8,567,500 are held by KNOT. In addition, KNOT, through its ownership of the General Partner, held 558,674 general partner units and 90,368 common units. The Partnership also has 3,750,000 Series A Preferred
Units outstanding.
Earnings per unit is determined by dividing net income, after deducting the distributions paid or to be made in
relation to the period, by the weighted-average number of units (other than the Series A Preferred Units) outstanding during the applicable period. The General Partner’s, common unitholders’ and subordinated unitholders’ interest in
net income are calculated as if all net income was distributed according to the terms of the Partnership Agreement, regardless of whether those earnings would or could be distributed. The Partnership Agreement does not provide for the distribution
of net income. Rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter less the amount of cash reserves established by the Board to provide
for the proper conduct of the Partnership’s business, including reserves for maintenance and replacement capital expenditures and anticipated credit needs and capital requirements and for funds to pay quarterly distributions on, and make any
redemption payments on, the Series A Preferred Units. In addition, KNOT, as the initial holder of all IDRs, has the right, at the time when there are no subordinated units outstanding and it has received incentive distributions at the highest level
to which it is entitled (48.0% for each of the prior four consecutive fiscal quarters), to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Unlike
available cash, net income is affected by non-cash items, such as depreciation and amortization, unrealized gains and losses on derivative instruments and unrealized foreign currency gains and losses.
For a description of the provisions of the Partnership Agreement relating to cash distributions, please see the Partnership’s Form 8-A/A
filed with the SEC on June 30, 2017.
15) Business Acquisitions
In December 2016, March 2017 and June 2017, the Partnership acquired from KNOT equity interests in certain subsidiaries which own and
operate the
Raquel Knutsen,
the
Tordis Knutsen
and the
Vigdis Knutsen,
respectively.
The Board and the Conflicts
Committee approved the purchase price for each transaction. The Conflicts Committee retained a financial advisor to assist with its evaluation of each of the transactions. The details of each transaction are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Provisional
Vigdis Knutsen
June 1,
2017
|
|
|
Provisional
Tordis Knutsen
March 1,
2017
|
|
|
Final
Raquel Knutsen
December 1,
2016
|
|
|
Purchase consideration (1)
|
|
$
|
31,759
|
|
|
$
|
32,983
|
|
|
$
|
20,252
|
|
|
Less: Fair value of net assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessels and equipment (2)
|
|
|
145,772
|
|
|
|
145,754
|
|
|
|
116,751
|
|
|
Intangibles: Above market time charter
|
|
|
1,458
|
|
|
|
1,468
|
|
|
|
|
|
|
Cash
|
|
|
3,438
|
|
|
|
609
|
|
|
|
7,146
|
|
|
Inventories
|
|
|
190
|
|
|
|
129
|
|
|
|
307
|
|
|
Derivative assets
|
|
|
226
|
|
|
|
1,377
|
|
|
|
207
|
|
|
Others current assets
|
|
|
128
|
|
|
|
1,348
|
|
|
|
183
|
|
|
Amounts due from related parties
|
|
|
18,374
|
|
|
|
20,834
|
|
|
|
59
|
|
|
Long-term debt
|
|
|
(114,411
|
)
|
|
|
(114,411
|
)
|
|
|
(79,950
|
)
|
|
Long-term debt from related parties
|
|
|
(22,703
|
)
|
|
|
(22,960
|
)
|
|
|
(24,019
|
)
|
|
Deferred debt issuance
|
|
|
928
|
|
|
|
795
|
|
|
|
1,059
|
|
|
Trade accounts payable
|
|
|
(187
|
)
|
|
|
(106
|
)
|
|
|
(167
|
)
|
|
Accrued expenses
|
|
|
(1,082
|
)
|
|
|
(503
|
)
|
|
|
(1,179
|
)
|
|
Prepaid charter and deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amounts due to related parties
|
|
|
(372
|
)
|
|
|
(1,351
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
31,759
|
|
|
|
32,983
|
|
|
|
20,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference between the purchase price and fair value of net assets acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference between the purchase price and allocated values
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
(1) The purchase price is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Provisional
Vigdis Knutsen
June 1,
2017
|
|
|
Provisional
Tordis Knutsen
March 1,
2017
|
|
|
Final
Raquel Knutsen
December 1,
2016
|
|
|
Cash consideration paid to KNOT (from KNOT)
|
|
$
|
28,109
|
|
|
$
|
31,242
|
|
|
$
|
(12,019
|
)
|
|
Purchase price adjustments
|
|
|
3,650
|
|
|
|
1,741
|
|
|
|
7,271
|
|
|
Seller’s credit
|
|
|
—
|
|
|
|
—
|
|
|
|
12,981
|
|
|
Seller’s loan
|
|
|
—
|
|
|
|
—
|
|
|
|
12,019
|
|
|
Purchase price
|
|
$
|
31,759
|
|
|
$
|
32,983
|
|
|
$
|
20,252
|
|
|
(2)
|
Vessels and equipment includes allocation to dry docking for the
Raquel Knutsen
of $1.7 million,
Tordis Knutsen
of $2.8 million, and for the
Vigdis Knutsen
of $2.7 million.
|
Raquel Knutsen
On
December 1, 2016, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT’s 100% interest in Knutsen Shuttle Tankers 19 AS, the company that owns and operates the
Raquel Knutsen
. The purchase price was
$116.5 million less $103.5 million of outstanding indebtedness related to the vessel plus other purchase price adjustments of $7.3 million. The Partnership accounted for this acquisition as an acquisition of a business. The purchase price
of the acquisition has been allocated to the identifiable assets acquired. The allocation of the purchase price to acquired identifiable assets was based on their fair values at the date of acquisition.
Revenue and profit contributions
The Raquel Knutsen business contributed revenues of $1.5 million and net income of $0.2 million to the Partnership for the period from
December 1, 2016 to December 31, 2016.
The table below shows comparative summarized consolidated pro forma financial
information for the Partnership for the year ended December 31, 2016, giving effect to the Partnership’s acquisition and financing of the
Raquel Knutsen
as if this acquisition had taken place on January 1, 2016. The information
is unaudited and is for illustration purposes only.
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Year Ended
December 31, 2016
|
|
|
Revenue
|
|
$
|
190,229
|
|
|
Net income
|
|
|
65,101
|
|
Included in the pro forma adjustments is depreciation related to the purchase price allocations performed on
the acquired identifiable assets as if the acquisition had taken place on January 1, 2016. In addition, the pro forma adjustments reflect changes in guarantors as if the acquisition had taken place from the date of delivery of the vessel.
Tordis Knutsen
On
March 1, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT’s 100% interest in KNOT Shuttle Tankers 24 AS (“KNOT 24”), the company, that owns and operates the
Tordis Knutsen
. The
purchase price was $147.0 million less $137.7 million of outstanding indebtedness plus $21.1 million for a receivable owed by KNOT to KNOT 24 and approximately $0.8 million for certain capitalized fees related to the financing of the
Tordis
Knutsen
plus $1.7 million of post-closing adjustments for working capital and interest rate swaps. The Partnership accounted for this acquisition as an acquisition of a business. The purchase price of the acquisition has been allocated to
the identifiable assets acquired. The provisional allocation of the purchase price to acquired identifiable assets was based on their fair values at the date of acquisition.
Revenue and profit contributions
The
Tordis Knutsen
business contributed revenues of $6.9 million and net income of $0.5 million to the Partnership for the period from
March 1, 2017 to June 30, 2017.
23
The table below shows comparative summarized consolidated pro forma financial information for the
Partnership for the six months ended June 30, 2017, giving effect to the Partnership’s acquisition and financing of the
Tordis Knutsen
as if this acquisition had taken place on January 1, 2017. Since
Tordis Knutsen
was
delivered from the yard in late 2016 and commenced on its time charter contract in January 2017, there are no pro forma figures for the year ended December 31, 2016. The information is unaudited and is for illustration purposes only.
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Six Months Ended
June 30, 2017
|
|
|
Revenue
|
|
$
|
101,392
|
|
|
Net income
|
|
|
26,864
|
|
Included in the pro forma adjustments is depreciation related to the purchase price allocations performed on
the acquired identifiable assets as if the acquisition had taken place on January 1, 2017. In addition, the pro forma adjustments reflect changes in guarantors and amortization of the above market time charter as if the acquisition had taken
place from the date of delivery of the vessel.
Vigdis Knutsen
On June 1, 2017, KNOT Shuttle Tankers AS, acquired KNOT’s 100% interest in KNOT Shuttle Tankers 25 AS (“KNOT 25”), the
company that owns and operates the
Vigdis Knutsen
. The purchase price was $147.0 million less $137.7 million of outstanding indebtedness plus $17.9 million for a receivable owed by KNOT to KNOT 25 and approximately $0.9 million for
certain capitalized fees related to the financing of the
Vigdis Knutsen
plus $3.7 million of post-closing adjustments for working capital and interest rate swaps. The Partnership accounted for this acquisition as an acquisition of a
business. The purchase price of the acquisition has been allocated to the identifiable assets acquired. The provisional allocation of the purchase price to acquired identifiable assets was based on their fair values at the date of acquisition.
Revenue and profit contributions
The
Vigdis Knutsen
business contributed revenues of $1.7 million and net income of $0.2 million to the Partnership for the period from
June 1, 2017 to June 30, 2017.
The table below shows comparative summarized consolidated pro forma financial information for
the Partnership for the six months ended June 30, 2017, giving effect to the Partnership’s acquisition and financing of the
Vigdis Knutsen
as if this acquisition had taken place on January 1, 2017. Since
Vigdis Knutsen
was delivered from the yard in February 2017 and commenced on its time charter contract in April 2017, there are no pro forma figures for the year ended December 31, 2016. The information is unaudited and is for illustration purposes only.
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Six Months Ended
June 30, 2017
|
|
|
Revenue
|
|
$
|
102,548
|
|
|
Net income
|
|
|
23,009
|
|
Included in the pro forma adjustments is depreciation related to the purchase price allocations performed on
the acquired identifiable assets as if the acquisition had taken place on January 1, 2017. In addition, the pro forma adjustments reflect changes in guarantors and amortization of the above market time charter as if the acquisition had taken
place from the date of delivery of the vessel.
16) Equity Offering and Sale of Series A Preferred Units
Equity Offering
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
January 2017
Offering
|
|
|
Gross proceeds received
|
|
$
|
56,125
|
|
|
Less: Underwriters’ discount
|
|
|
925
|
|
|
Less: Offering expenses
|
|
|
321
|
|
|
|
|
|
|
|
|
Net proceeds received
|
|
$
|
54,879
|
|
|
|
|
|
|
|
24
On January 10, 2017, the Partnership sold 2,500,000 common units, representing limited
partner interests, in an underwritten public offering (the “January 2017 Offering”). The Partnership’s total net proceeds from the January 2017 Offering were $54.9 million.
The Partnership used the net proceeds from the January 2017 Offering to fund the cash portion of the purchase price of the
Tordis
Knutsen
and to repay debt and for general partnership purposes.
Sale of Series A Preferred units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
February 2017
Series A
Preferred Units
|
|
|
June 2017
Series A
Preferred Units
|
|
|
Total
Series A
Preferred Units
|
|
|
Gross proceeds received
|
|
$
|
50,000
|
|
|
$
|
40,000
|
|
|
$
|
90,000
|
|
|
Less: Fee
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
2,000
|
|
|
Less: Expenses
|
|
|
386
|
|
|
|
171
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds received
|
|
$
|
48,614
|
|
|
$
|
38,829
|
|
|
$
|
87,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. After deducting fees and expenses, the net proceeds from the sale were $48.6 million. The Partnership used the net proceeds from the sale to fund the cash portion of the purchase price of the
Tordis
Knutsen
and to repay debt and for general partnership purposes.
On June 30, 2017, the Partnership (i) issued and sold in a
second private placement 1,666,667 additional Series A Preferred Units at a price of $24.00 per unit and (ii) amended and restated its Partnership Agreement to make certain amendments to the terms of the Series A Preferred Units, including the
2,083,333 Series A Preferred Units issued on February 2, 2017. After deducting estimated fees and expenses, the net proceeds of the sale were $38.8 million. The Partnership used $30.0 million of the net proceeds to repay the revolving credit
facility, which was drawn in connection with acquisition of the
Vigdis Knutsen.
The Series A Preferred Units rank senior to the
common units as to the payment of distributions and amounts payable upon liquidation, dissolution or winding up. The Series A Preferred Units have a liquidation preference of $24.00 per unit, plus any Series A unpaid cash distributions, plus all
accrued but unpaid distributions on such Series A Preferred Unit with respect to the quarter in which the liquidation occurs to the date fixed for the payment of any amount upon liquidation. The Series A Preferred Units are entitled to cumulative
distributions from their initial issuance date, with distributions being calculated at an annual rate of 8.0% on the stated liquidation preference and payable quarterly in arrears within 45 days after the end of each quarter, when, as and if
declared by the Board.
The Series A Preferred Units will be generally convertible, at the option of the holders of the Series A Preferred
Units, into common units commencing on February 2, 2019 at the then applicable conversion rate. The conversion rate will be subject to adjustment under certain circumstances. In addition, the conversion rate will be redetermined on a quarterly
basis, such that the conversion rate will be equal to $24.00 (the “Issue Price”) divided by the product of (x) the book value per common unit at the end of the immediately preceding quarter (pro-forma for per unit cash distributions
payable with respect to such quarter) multiplied by (y) the quotient of (i) the Issue Price divided by (ii) the book value per common unit on February 2, 2017. In addition, the Partnership may redeem the Series A Preferred Units
at any time between February 2, 2019 and February 2, 2027 at the redemption price specified in the Partnership Agreement, provided, however, that upon notice from the Partnership to the holders of Series A Preferred Units of its intent to
redeem, such holders may elect, instead, to convert their Series A Preferred Units into common units at the then applicable conversion rate.
Upon a change of control of the Partnership, the holders of Series A Preferred Units will have the right to require cash redemption at 100% of
the Issue Price. In addition, the holders of Series A Preferred Units will have the right to cause the Partnership to redeem the Series A Preferred Units on February 2, 2027 in, at the option of the Partnership, (i) cash at a price equal
to 70% of the Issue Price or (ii) common units such that each Series A Preferred Unit receives common units worth 80% of the Issue Price (based on the volume-weighted average trading price, as adjusted for splits, combinations and other similar
transactions, of the common units as reported on the NYSE for the 30 trading day period ending on the fifth trading day immediately prior to the redemption date) plus any accrued and unpaid distributions. In addition, at any time following
February 2, 2019 and subject to certain conditions, the Partnership will have the right to convert the Series A Preferred Units into common units at the then applicable conversion rate if the aggregate market value (calculated as set forth in
the partnership agreement) of the common units into which the then outstanding Series A Preferred Units are convertible, based on the then applicable conversion rate, is greater than 130% of the aggregate Issue Price of the then outstanding Series A
Preferred Units.
25
For additional information about the Series A Preferred Units, please read the Partnership’s
Reports on Form 6-K filed with the Securities and Exchange Commission on February 2, 2017, May 17, 2017 and June 30, 2017 and Form 8-A/A filed on June 30, 2017.
26
17) Unit Activity
The following table shows the movement in the number of common units, subordinated units, general partner units and Series A Preferred Units
from December 31, 2015 until June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in units)
|
|
Common Units
|
|
|
Subordinated Units
|
|
|
General Partner Units
|
|
|
Convertible Preferred Units
|
|
|
December 31, 2015
|
|
|
18,626,594
|
|
|
|
8,567,500
|
|
|
|
558,674
|
|
|
|
—
|
|
|
Subordinated units converted to common units
|
|
|
8,567,500
|
|
|
|
(8,567,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
December 31, 2016
|
|
|
27,194,094
|
|
|
|
—
|
|
|
|
558,674
|
|
|
|
—
|
|
|
January 6, 2017: Public offering
|
|
|
2,500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
February 2, 2017: Sale of Series A Preferred Units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,083,333
|
|
|
June 30, 2017: Sale of Series A Preferred Units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,666,667
|
|
|
June 30, 2017
|
|
|
29,694,094
|
|
|
|
—
|
|
|
|
558,674
|
|
|
|
3,750,000
|
|
On August 12, 2015, the Board authorized a program for the Partnership to repurchase up to 666,667 of its
common units. The board of directors of the General Partner concurrently authorized the General Partner to purchase up to 333,333 common units of the Partnership. On August 10, 2016, the Board and the board of directors of the General Partner
authorized an extension of the common unit purchase program to August 31, 2017, and on August 9, 2017, the Board and the board of directors of the General Partner authorized a further extension of the program to August 31, 2018. No
additional common units were purchased by the Partnership or the General Partner in 2016 or to date in 2017. The Partnership and the General Partner may therefore purchase up to an additional 485,761 and 242,965 common units, respectively, under the
extended program.
All purchases are made pursuant to a single program and are allocated approximately two-thirds to the Partnership and
one-third to the General Partner. There is no obligation to purchase any specific number of common units and the program may be modified, suspended, extended or terminated at any time. Common units repurchased by the Partnership under the program
have been cancelled.
The subordination period for the 8,567,500 subordinated units ended on May 18, 2016. All of the subordinated
units, which were owned by KNOT, converted to common units on a one-for-one basis.
18) Subsequent Events
The Partnership has evaluated subsequent events from the balance sheet date through August 9, 2017, the date at which the unaudited
condensed consolidated interim financial statements were available to be issued, and determined that there are no other items to disclose, except as follows:
On July 18, 2017, the Partnership declared a cash distribution of $0.52 per common unit with respect to the quarter ended June 30,
2017 to be paid on August 15, 2017 to unitholders of record as of the close of business on August 2, 2017. On July 18, 2017, the Partnership also declared a cash distribution payable to Series A Preferred Unitholders with respect to
the quarter ended June 30, 2017 in an aggregate amount equal to $1.0 million.
On August 9, 2017, the Partnership entered into
an agreement with NTT Finance Corporation for an unsecured revolving credit facility of $25 million. The facility will mature in August 2019, bear interest at LIBOR plus a margin of 1.8% and have a commitment fee of 0.5% on the undrawn portion of
the facility. Closing of the facility is expected to occur by the end of August 2017.
On August 9, 2017, the Partnership’s wholly
owned subsidiary, KNOT Shuttle Tankers AS, entered into a share purchase agreement with KNOT to acquire KNOT Shuttle Tankers 26 AS (“KNOT 26”), the company that owns the shuttle tanker,
Lena Knutsen
, from KNOT (the “Lena
Acquisition”). The Partnership expects the Lena Acquisition to close by September 30, 2017, subject to customary closing conditions. The purchase price of the Lena Acquisition is $142.0 million, less approximately $133.8 million of
outstanding indebtedness related to the
Lena Knutsen
plus approximately $24.1 million for a receivable owed by KNOT to KNOT 26 (the “KNOT 26 Receivable”) and approximately $1.0 million for certain capitalized fees related to the
financing of the
Lena Knutsen
. On the closing of the Lena Acquisition, KNOT 26 will repay approximately $41.9 million of the indebtedness, leaving an aggregate of approximately $91.9 million of debt outstanding under the secured credit
facility related to the vessel (the “Lena Facility”). The Lena Facility is repayable in quarterly installments with a final balloon payment of $69.8 million due at maturity in June 2022. The Lena 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 currency fluctuations and accrued interest on the KNOT 26 Receivable, working capital, Norwegian tonnage
entrance tax and interest rate swaps. On the closing of the Lena Acquisition, KNOT will repay the KNOT 26 Receivable in full.
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references in this report to the “Partnership,” “we,” “our,” “us” or like
terms, refer to KNOT Offshore Partners LP and its subsidiaries. Those statements in this section that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See “Forward-Looking Statements”
on page 45 for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.
This section should be read in conjunction with our unaudited condensed consolidated financial statements for the interim periods presented elsewhere in
this report, as well as our historical consolidated financial statements and notes thereto included in our Annual Report on Form 20-F for the year ended December 31, 2016 (the “2016 20-F”). Under our Partnership Agreement, KNOT
Offshore Partners GP LLC, the general partner of the Partnership (the “General Partner”), has irrevocably delegated to the Partnership’s board of directors the power to oversee and direct the operations of, and to manage and determine
the strategies and policies of, the Partnership. During the period from the Partnership’s initial public offering (“IPO”) in April 2013 until the time of the Partnership’s first annual general meeting (“AGM”) on
June 25, 2013, the General Partner retained the sole power to appoint, remove and replace all members of the Partnership’s board of directors. From the first AGM, four of the seven board members became electable by the common unitholders
and accordingly, from this date, the General Partner no longer retained the power to control the Partnership’s board of directors and, hence, the Partnership. As a result, the Partnership is no longer considered to be under common control with
Knutsen NYK Offshore Tankers AS (“KNOT”) and as a consequence, the Partnership no longer accounts for any vessel acquisitions from KNOT as transfer of a business between entities under common control.
General
We are a limited partnership formed to own,
operate and acquire offshore shuttle tankers under long-term charters, which we define as charters of five years or more. Our fleet of shuttle tankers has been contributed to us by KNOT or purchased by us from KNOT. KNOT is jointly owned by TS
Shipping Invest AS (“TSSI”) and Nippon Yusen Kaisha (“NYK”). TSSI is controlled by our Chairman and is a private Norwegian company with ownership interests in shuttle tankers, LNG tankers and product/chemical tankers. NYK is a
Japanese public company with a fleet of approximately 800 vessels, including bulk carriers, containerships, tankers and specialized vessels.
As of
June 30, 2017, we had a modern fleet of thirteen shuttle tankers that operate under long-term charters with major oil and gas companies engaged in offshore production. We intend to operate our vessels under long-term charters with stable cash
flows and to grow our position in the shuttle tanker market through acquisitions from KNOT and third parties. Pursuant to the Omnibus Agreement we have entered into with KNOT in connection with the IPO (the “Omnibus Agreement”), we have
the right to purchase from KNOT any shuttle tankers operating under charters of five or more years. This right will continue throughout the entire term of the Omnibus Agreement.
Recent Developments
Common Unit Offering
On January 10, 2017, the Partnership sold 2,500,000 common units, representing limited partner interests, in an underwritten public
offering, raising approximately $54.9 million in net proceeds.
Tordis Knutsen Acquisition
On March 1, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT Shuttle Tankers 24 AS (“KNOT 24”), the
company that owns the shuttle tanker
Tordis Knutsen
, from KNOT for a purchase price of $147.0 million less $137.7 million of outstanding indebtedness plus approximately $21.1 million for a receivable owed by KNOT to KNOT 24 and
approximately $0.8 million for certain capitalized fees related to the financing of the
Tordis Knutsen
plus $1.7 million of post-closing adjustments for working capital and interest rate swaps. On the closing of the 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 purchase price was settled in cash in cash. On the closing
of the acquisition, KNOT repaid the receivable in full.
Vigdis Knutsen Acquisition
On June 1, 2017, KNOT Shuttle Tankers AS acquired KNOT Shuttle Tankers 25 AS (“KNOT 25”), the company that owns the shuttle tanker
Vigdis
Knutsen
, from KNOT for a purchase price of $147.0 million less $137.7 million of outstanding indebtedness plus approximately $17.9 million for a receivable owed by KNOT to KNOT 25 and approximately $0.9 million for certain capitalized fees
related to the financing of the
Vigdis Knutsen
plus $3.7 million of post-closing adjustments for working capital and interest rate swaps
.
On the closing of the acquisition,
28
KNOT 25 repaid approximately $42.9 million of the indebtedness, leaving an aggregate of approximately $94.8 million of debt outstanding under the secured credit facility related to the vessel.
The purchase price was settled in cash. On the closing of the acquisition, KNOT repaid the receivable in full.
Series A Convertible Preferred Units
On February 2, 2017, the Partnership issued and sold in a private placement 2,083,333 Series A Convertible Preferred Units (the “Series
A Preferred Units”) at a price of $24 per unit. After deducting fees and expenses, the net proceeds from the sale were $48.6 million. The Partnership used the proceeds from the sale to fund the cash portion of the purchase price of the
Tordis Knutsen
and to repay debt and for general partnership purposes. On June 30, 2017, the Partnership (i) issued and sold in a second private placement 1,666,667 additional Series A Preferred Units at a price of $24 per unit and
(ii) amended and restated its partnership agreement to make certain amendments to the terms of the Series A Preferred Units, including the 2,083,333 Series A Preferred Units issued on February 2, 2017. Among other things, the partnership
agreement (i) provides that the consent of at least 67% of the Series A Preferred Units will be required to amend the terms of the Series A Preferred Units or issue any parity securities (subject to certain exceptions), (ii) modifies
certain provisions related to conversions at the request of the Partnership and conversions at the request of the holders of Series A Preferred Units and (iii) provides that holders of Series A Preferred Units may transfer any such units at any
time when the Partnership’s common units are no longer listed on a U.S. national securities exchange or at any time when an event of default has occurred and is continuing under any indebtedness of the Partnership or its subsidiaries in an
outstanding principal amount, individually or in the aggregate, of at least $10 million.
After deducting fees and expenses, the net proceeds from the
second private placement were $38.8 million. The Partnership used $30.0 million of the net proceeds to repay the revolving credit facility which was drawn in connection with the
Vigdis Knutsen
acquisition.
The Series A Preferred Units rank senior to the common units as to the payment of distributions and amounts payable upon liquidation, dissolution or winding
up. The Series A Preferred Units have a liquidation preference of $24.00 per unit, plus any Series A unpaid cash distributions, plus all accrued but unpaid distributions on such Series A Preferred Unit with respect to the quarter in which the
liquidation occurs to the date fixed for the payment of any amount upon liquidation. The Series A Preferred Units are entitled to cumulative distributions from their initial issuance date, with distributions being calculated at an annual rate of
8.0% on the stated liquidation preference and payable quarterly in arrears within 45 days after the end of each quarter, when, as and if declared by the Board.
The Series A Preferred Units will be generally convertible, at the option of the holders of the Series A Preferred Units, into common units commencing on
February 2, 2019 at the then applicable conversion rate. The conversion rate will be subject to adjustment under certain circumstances. In addition, the conversion rate will be redetermined on a quarterly basis, such that the conversion rate
will be equal to $24.00 (the “Issue Price”) divided by the product of (x) the book value per common unit at the end of the immediately preceding quarter (pro-forma for per unit cash distributions payable with respect to such quarter)
multiplied by (y) the quotient of (i) the Issue Price divided by (ii) the book value per common unit on February 2, 2017. In addition, the Partnership may redeem the Series A Preferred Units at any time between February 2,
2019 and February 2, 2027 at the redemption price specified in the Partnership Agreement, provided, however, that upon notice from the Partnership to the holders of Series A Preferred Units of its intent to redeem, such holders may elect,
instead, to convert their Series A Preferred Units into common units at the then applicable conversion rate.
Upon a change of control of the Partnership,
the holders of Series A Preferred Units will have the right to require cash redemption at 100% of the Issue Price. In addition, the holders of Series A Preferred Units will have the right to cause the Partnership to redeem the Series A Preferred
Units on February 2, 2027 in, at the option of the Partnership, (i) cash at a price equal to 70% of the Issue Price or (ii) common units such that each Series A Preferred Unit receives common units worth 80% of the Issue Price (based
on the volume-weighted average trading price, as adjusted for splits, combinations and other similar transactions, of the common units as reported on the NYSE for the 30 trading day period ending on the fifth trading day immediately prior to the
redemption date) plus any accrued and unpaid distributions. In addition, at any time following February 2, 2019 and subject to certain conditions, the Partnership will have the right to convert the Series A Preferred Units into common units at
the then applicable conversion rate if the aggregate market value (calculated as set forth in the partnership agreement) of the common units into which the then outstanding Series A Preferred Units are convertible, based on the then applicable
conversion rate, is greater than 130% of the aggregate Issue Price of the then outstanding Series A Preferred Units.
Cash Distributions
On May 15, 2017, we paid a quarterly cash distribution of $0.52 per common unit and $0.3093 per Series A Preferred Unit with respect to the
quarter ended March 31, 2017. The cash distributions amounted to $16.4 million for common unitholders and $0.7 million for Series A Preferred unitholders.
On July 18, 2017, the Partnership declared a cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2017 to be paid
on August 15, 2017 to unitholders of record as of the close of business on August 2, 2017. On July 18, 2017, the Partnership also declared a cash distribution payable to holders of the Series A Preferred Units on August 15, 2017
with respect to the quarter ended June 30, 2017 in an aggregate amount equal to $1.0 million.
29
Extension of Windsor Knutsen Charter
On July 14, 2017, Shell utilised its option to extend the time charter of the vessel
Windsor Knutsen
by one additional year until October 2018.
Following the extension, Shell has five remaining one-year options to extend the time charter until October 2023.
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 of directors (the “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.
On August 9, 2017, we held our 2017 annual meeting of limited partners at which Hans Petter Aas was elected as a Class IV director of the
Partnership whose term will expire at the 2021 annual meeting of limited partners.
Common Unit Purchase Program
On August 10, 2016, the boards of directors of the Partnership and the General Partner each authorized an extension of the common unit purchase program to
August 31, 2017. Originally approved on August 12, 2015, the program authorized the Partnership to repurchase up to 666,667 of its common units and the General Partner to purchase up to 333,333 common units of the Partnership. On
August 9, 2017, the Board and the board of directors of the General Partner authorized a further extension of the program to August 31, 2018. As of December 31, 2015, the Partnership and the General Partner had purchased 180,906 and
90,368 common units, respectively, pursuant to the program at an average purchase price of $12.71 per unit. No additional common units had been purchased by the Partnership or the General Partner as of June 30, 2017. The Partnership and the
General Partner may therefore purchase up to an additional 485,761 and 242,965 common units, respectively, under the extended program.
Revolving
Credit Facility
On August 9, 2017, the Partnership entered into an agreement with NTT Finance Corporation for an unsecured revolving credit
facility of $25 million. The facility will mature in August 2019, bear interest at LIBOR plus a margin of 1.8% and have a commitment fee of 0.5% on the undrawn portion of the facility. Closing of the facility is expected to occur by the end of
August 2017.
Lena Knutsen Acquisition
On
August 9, 2017, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, entered into a share purchase agreement with KNOT to acquire KNOT Shuttle Tankers 26 AS (“KNOT 26”), the company that owns the shuttle tanker,
Lena Knutsen
, from KNOT (the “Lena Acquisition”). The Partnership expects the Lena Acquisition to close by September 30, 2017, subject to customary closing conditions. The purchase price of the Lena Acquisition is $142.0
million, less approximately $133.8 million of outstanding indebtedness related to the
Lena Knutsen
plus approximately $24.1 million for a receivable owed by KNOT to KNOT 26 (the “KNOT 26 Receivable”) and approximately $1.0 million
for certain capitalized fees related to the financing of the
Lena Knutsen
. On the closing of the Lena Acquisition, KNOT 26 will repay approximately $41.9 million of the indebtedness, leaving an aggregate of approximately $91.9 million of debt
outstanding under the secured credit facility related to the vessel (the “Lena Facility”). The Lena Facility is repayable in quarterly installments with a final balloon payment of $69.8 million due at maturity in June 2022. The Lena
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 currency fluctuations and accrued interest on the KNOT 26
Receivable, working capital, Norwegian tonnage entrance tax and interest rate swaps. On the closing of the Lena Acquisition, KNOT will repay the KNOT 26 Receivable in full.
Results of Operations
Three Months
Ended June 30, 2017 Compared with the Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
|
Time charter and bareboat revenues
|
|
$
|
51,537
|
|
|
$
|
42,864
|
|
|
$
|
8,673
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
Loss of hire insurance recoveries
|
|
|
2,276
|
|
|
|
—
|
|
|
|
2,276
|
|
|
|
—
|
|
|
Other income
|
|
|
593
|
|
|
|
199
|
|
|
|
394
|
|
|
|
198
|
%
|
|
Vessel operating expenses
|
|
|
9,427
|
|
|
|
7,975
|
|
|
|
1,452
|
|
|
|
18
|
%
|
|
Depreciation
|
|
|
17,372
|
|
|
|
13,913
|
|
|
|
3,459
|
|
|
|
25
|
%
|
|
General and administrative expenses
|
|
|
1,493
|
|
|
|
948
|
|
|
|
545
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
Interest income
|
|
|
44
|
|
|
|
—
|
|
|
|
44
|
|
|
|
—
|
|
|
Interest expense
|
|
|
(7,252
|
)
|
|
|
(5,054
|
)
|
|
|
(2,198
|
)
|
|
|
43
|
%
|
|
|
|
|
|
|
|
Other finance expense
|
|
|
(328
|
)
|
|
|
(334
|
)
|
|
|
6
|
|
|
|
-2
|
%
|
|
Realized and unrealized gain (loss) on derivative instruments
|
|
|
(1,536
|
)
|
|
|
(3,176
|
)
|
|
|
1,640
|
|
|
|
-52
|
%
|
|
Net gain (loss) on foreign currency transactions
|
|
|
(124
|
)
|
|
|
(82
|
)
|
|
|
(42
|
)
|
|
|
51
|
%
|
|
Income tax benefit (expense)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
0
|
%
|
|
Net income
|
|
|
16,915
|
|
|
|
11,578
|
|
|
|
5,337
|
|
|
|
46
|
%
|
30
Time Charter and Bareboat Revenues:
Time charter and bareboat revenues increased by $8.7 million to
$51.5 million for the three months ended June 30, 2017 compared to $42.9 million for the three months ended June 30, 2016. The increase was mainly due to increased time charter revenues from the
Raquel Knutsen
, the
Tordis Knutsen
and the
Vigdis Knutsen
being included in the results of operations from December 1, 2016, March 1, 2017 and June 1, 2017, respectively.
Loss of hire insurance recoveries:
Loss of hire insurance recoveries for the three months ended June 30, 2017 were $2.3 million compared to $nil
for the three months ended June 30, 2016. The loss of hire insurance recoveries were related to a technical default with
Raquel Knutsen’
s controllable pitch propeller.
Raquel Knutsen
was offhire from February 22, 2017 to
May 15, 2017. Under our loss of hire polices, our insurer will pay us the hire rate under the time-charter in respect of each vessel for each day, in excess of 14 deductible days, for the time that the vessel is out of service as a result of
damage, for a maximum of 180 days. No further loss of hire recoveries are expected for this claim.
Other income:
Other income for the three months
ended June 30, 2017 was $0.6 million compared to $0.2 million for the three months ended June 30, 2016. Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payment of the hire rate that is equal to or greater than the hire rate
payable under the initial charters of the
Bodil Knutsen
and
Windsor Knutsen
for a period of five years from the closing date of the IPO. In October 2015, the
Windsor Knutsen
commenced operating under a new Shell time charter.
The hire rate for the new charter is below the initial charter hire rate and the difference between the new hire rate and the initial rate is paid by KNOT. During the three months ended June 30, 2017, $0.3 million was recognized as income
pursuant to this guarantee compared to $0.2 million for same period last year. For the three months ended June 30, 2017 $0.3 million was recognized as guarantee income from KNOT in connection with the offhire and repairs for the
Vigdis
Knutsen
. In connection with the
Vigdis Knutsen
acquisition, KNOT agreed to reimburse the Partnership for repair costs and offhire incurred by the
Vigdis Knutsen
as a result of damages to its hull in connection with a ship-to ship
loading on May 24, 2017.
Vessel operating expenses:
Vessel operating expenses for the three months ended June 30, 2017 were
$9.4 million, an increase of $1.5 million from $8.0 million in the three months ended June 30, 2016. The increase is mainly attributable to the increase of $2.5 million due to the
Raquel Knutsen
,
Tordis Knutsen
and the
Vigdis Knutsen
being included in the results of operations from December 1, 2016, March 1, 2017 and June 1, 2017, respectively. The increase was partially offset by
a $0.5 insurance claim related to the
Raquel Knutsen
and lower operating expenses of $0.5 million mainly due to the strengthening of the U.S. dollar against the NOK during the three months ended June 30, 2017 compared to
same period last year.
Depreciation:
Depreciation expense for the three months ended June 30, 2017 was $17.4 million, an
increase of $3.5 million from $13.9 million in the three months ended June 30, 2016. This increase was mainly due to the
Raquel Knutsen
, the
Tordis Knutsen
and the
Vigdis Knutsen
being included in the results of
operations from December 1, 2016, March 1, 2017 and June 1, 2017, respectively.
General and administrative expenses:
General
and administrative expenses for the three months ended June 30, 2017 were $1.5 million, compared to $0.9 million for the same period in 2016. The increase is mainly due to additional operational activity during the three months ended
June 30, 2017 and the increased size of the fleet.
Interest income:
Interest income for the three months ended June 30, 2017 was
$44,000, compared to $nil for the three months ended June 30, 2016.
Interest expense:
Interest expense for the three months ended
June 30, 2017 was $7.3 million, an increase of $2.2 million from $5.1 million for the three months ended June 30, 2016. The increase was mainly due to additional debt incurred in connection with the acquisition of the
Raquel Knutsen
, the
Tordis Knutsen
and the
Vigdis Knutsen
and higher LIBOR during the three months ended June 30, 2017 compared to the three months ended June 30, 2016.
Other finance expense:
Other finance expense was $0.3 million for the three months ended June 30, 2017 and $0.3 million for the three
months ended June 30, 2016. Other finance expense is primarily related to bank fees and guarantee commissions.
Realized and unrealized gain
(loss) on derivative instruments:
Realized and unrealized loss on derivative instruments for the three months ended June 30, 2017 was $1.5 million, compared to $3.2 million for the three months ended June 30, 2016, as set
forth in the table below:
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Realized gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
(938
|
)
|
|
$
|
(1,252
|
)
|
|
$
|
314
|
|
|
Foreign exchange forward contracts
|
|
|
(97
|
)
|
|
|
(316
|
)
|
|
|
219
|
|
|
Total realized gain (loss):
|
|
|
(1,035
|
)
|
|
|
(1,568
|
)
|
|
|
533
|
|
|
Unrealized gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
(1,334
|
)
|
|
|
(1,518
|
)
|
|
|
184
|
|
|
Foreign exchange forward contracts
|
|
|
833
|
|
|
|
(90
|
)
|
|
|
923
|
|
|
Total unrealized gain (loss):
|
|
|
(501
|
)
|
|
|
(1,608
|
)
|
|
|
1,107
|
|
|
Total realized and unrealized gain (loss) on deriviative instruments:
|
|
$
|
(1,536
|
)
|
|
$
|
(3,176
|
)
|
|
$
|
1,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017, the total notional amount of the Partnership’s outstanding interest rate swap contracts that
were entered into in order to hedge outstanding or forecasted debt obligations was $536.7 million and the Partnership had entered into foreign exchange forward contracts, selling a total notional amount of $40.0 million against the Norwegian
Kroner (NOK) at an average exchange rate of NOK 8.31 per 1.0 U.S. Dollar, which are economic hedges for certain vessel operating expenses and general expenses in NOK. Of the unrealized loss for the three months ended June 30, 2017,
$1.3 million related to mark-to-market losses on interest rate swaps due to a decrease in swap rates during the quarter, and an unrealized gain of $0.8 million related to foreign exchange contracts due to the strengthening of the NOK against the U.S
Dollar.
Net loss on foreign currency transactions:
Net loss on foreign currency transactions for the three months ended June 30, 2017 and
2016 was $0.1 million.
Income tax (expense):
Income tax expense for the three months ended June 30, 2017 and 2016 was $3,000.
Net income:
As a result of the foregoing, we earned net income of $16.9 million for the three months ended June 30, 2017 compared to net
income of $11.6 million for the three months ended June 30, 2016.
Six Months Ended June 30, 2017 Compared with the Six
Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
|
Time charter and bareboat revenues
|
|
$
|
95,284
|
|
|
$
|
84,690
|
|
|
$
|
10,594
|
|
|
|
13
|
%
|
|
Loss of hire insurance recoveries
|
|
|
3,426
|
|
|
|
—
|
|
|
|
3,426
|
|
|
|
—
|
|
|
Other income
|
|
|
687
|
|
|
|
399
|
|
|
|
288
|
|
|
|
72
|
%
|
|
Vessel operating expenses
|
|
|
19,709
|
|
|
|
15,622
|
|
|
|
4,087
|
|
|
|
26
|
%
|
|
Depreciation
|
|
|
33,125
|
|
|
|
27,805
|
|
|
|
5,320
|
|
|
|
19
|
%
|
|
General and administrative expenses
|
|
|
2,962
|
|
|
|
2,256
|
|
|
|
706
|
|
|
|
31
|
%
|
|
Interest income
|
|
|
80
|
|
|
|
3
|
|
|
|
77
|
|
|
|
2567
|
%
|
|
Interest expense
|
|
|
(13,466
|
)
|
|
|
(10,084
|
)
|
|
|
(3,382
|
)
|
|
|
34
|
%
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
|
Other finance expense
|
|
|
(630
|
)
|
|
|
(601
|
)
|
|
|
(29
|
)
|
|
|
5
|
%
|
|
Realized and unrealized gain (loss) on derivative instruments
|
|
|
(1,017
|
)
|
|
|
(6,360
|
)
|
|
|
5,343
|
|
|
|
-84
|
%
|
|
Net gain (loss) on foreign currency transactions
|
|
|
(218
|
)
|
|
|
(117
|
)
|
|
|
(101
|
)
|
|
|
86
|
%
|
|
Income tax benefit (expense)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
0
|
%
|
|
Net income
|
|
|
28,344
|
|
|
|
22,241
|
|
|
|
6,103
|
|
|
|
27
|
%
|
Time Charter and Bareboat Revenues:
Time charter and bareboat revenues increased by $10.6 million to
$95.3 million for the six months ended June 30, 2017 compared to $84.7 million for the six months ended June 30, 2016. This was principally due to increased revenues from the
Raquel Knutsen
, the
Tordis Knutsen
and
the
Vigdis Knutsen
being included in the results of operations from December 1, 2016, March 1, 2017 and June 1, 2017, respectively, and full earnings from the
Bodil Knutsen
during the six months ended June 30,
2017 compared to 20.9 days offhire due to planned drydocking in the same period last year. The increase was partially offset by a reduction in time charter earnings due to the
Windsor Knutsen
drydocking during the six months ended
June 30, 2017, and lower utilization of the fleet during the six months ended June 30, 2017 due to 14 days deductible offhire for the vessel the
Raquel Knutsen
and one less operational day in that period compared to the same period
last year.
Loss of hire insurance recoveries:
Loss of hire insurance recoveries for the six months ended June 30, 2017 were $3.4 million
compared to $nil for the six months ended June 30, 2016. The loss of hire insurance recoveries were related to a technical default with the
Raquel Knutsen’s
controllable pitch propeller
.
The
Raquel Knutsen
was offhire
from February 22, 2017 to May 15, 2017.
Other income:
Other income for the six months ended June 30, 2017 was $0.7 million
compared to $0.4 million for the six months ended June 30, 2016. During the six months ended June 30, 2017 and 2016, $0.3 million and $0.4 million, respectively, was recognized as income pursuant to KNOT’s guarantee of the
initial hire rate under the
Windsor Knutsen
time charter.
Vessel operating expenses:
Vessel operating expenses for the six months ended
June 30, 2017 were $19.7 million, an increase of $4.1 million from $15.6 million in the six months ended June 30, 2016. The increase was primarily due to an increase of $3.9 million from the
Raquel Knutsen
, the
Tordis Knutsen
and the
Vigdis Knutsen
being included in the results of operations from December 1, 2016, March 1, 2017 and June 1, 2017, respectively, and $0.6 million was related to bunkers consumption in
connection with the drydocking of the
Windsor Knutsen
. This was partially offset by lower operating expenses for the rest of the fleet.
Depreciation:
Depreciation expense for the six months ended June 30, 2017 was $33.1 million, an increase of $5.3 million from
$27.8 million in the six months ended June 30, 2016. This increase was mainly due to the
Raquel Knutsen
, the
Tordis Knutsen
and the
Vigdis Knutsen
being included in the results of operations from December 1,
2016, March 1, 2017 and June 1, 2017, respectively.
General and administrative expenses:
General and administrative expenses for
the six months ended June 30, 2017 were $3.0 million, compared to $2.3 million for the same period in 2016. The increase is mainly due incremental expenses during the six months ended June 30, 2017 in connection with the January
2017 common unit offering, private placement of Series A Preferred Units and the acquisitions of the
Tordis Knutsen
and the
Vigdis Knutsen
.
Interest income:
Interest income for the six months ended June 30, 2017 was $80,000, compared to $3,000 for the six months ended June 30,
2016.
Interest expense:
Interest expense for the six months ended June 30, 2017 was $13.5 million, an increase of $3.4 million from
$10.1 million in the six months ended June 30, 2016. The increase was mainly due to additional debt incurred in connection with the acquisition of the
Raquel Knutsen
, the
Tordis Knutsen
and the
Vigdis Knutsen
and
higher LIBOR during the six months ended June 30, 2017 compared to the six months ended June 30, 2016.
Other finance expense:
Other
finance expense for the six months ended June 30, 2017 and 2016 was $0.6 million. Other finance expense is primarily related to bank fees and guarantee commissions.
Realized and unrealized gain (loss) on derivative instruments:
Realized and unrealized loss on derivative instruments for the six months ended
June 30, 2017 was $1.0 million, compared to $6.4 million for the six months ended June 30, 2016, as set forth in the table below:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Realized gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
(1,607
|
)
|
|
$
|
(2,176
|
)
|
|
$
|
569
|
|
|
Foreign exchange forward contracts
|
|
|
(166
|
)
|
|
|
(316
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized gain (loss):
|
|
|
(1,773
|
)
|
|
|
(2,492
|
)
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
(275
|
)
|
|
|
(5,866
|
)
|
|
|
5,591
|
|
|
Foreign exchange forward contracts
|
|
|
1,031
|
|
|
|
1,998
|
|
|
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gain (loss):
|
|
|
756
|
|
|
|
(3,868
|
)
|
|
|
4,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gain (loss) on deriviative instruments:
|
|
$
|
(1,017
|
)
|
|
$
|
(6,360
|
)
|
|
$
|
5,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreased net realized and unrealized loss on derivative instruments was mainly due to an increase in long-term interest
rates.
Net loss on foreign currency transactions:
Net loss on foreign currency transactions for the six months ended June 30, 2017 was
$0.2 million, compared to $0.1 million for the six months ended June 30, 2016.
Income tax expense:
Income tax expense for the six months
ended June 30, 2017 and 2016 was $6,000.
Net income:
As a result of the foregoing, we earned net income of $28.3 million for the six
months ended June 30, 2017 compared to net income of $22.2 million for the six months ended June 30, 2016.
Liquidity and Capital
Resources
Liquidity and Cash Needs
We operate in
a capital-intensive industry, and we expect to finance the purchase of additional vessels and other capital expenditures through a combination of borrowings from commercial banks, cash generated from operations and debt and equity financings. In
addition to paying distributions, our other liquidity requirements relate to servicing our debt, funding investments (including the equity portion of investments in vessels), funding working capital and maintaining cash reserves against fluctuations
in operating cash flows. We believe our current resources are sufficient to meet our working capital requirements for our current business. Generally, our long-term sources of funds are cash from operations, long-term bank borrowings and other debt
and equity financings. Because we distribute our available cash, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion capital
expenditures.
Our funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity. Cash and cash
equivalents are held primarily in U.S. Dollars with some balances held in NOK, British Pounds and Euros. We have not made use of derivative instruments other than for interest rate and currency risk management purposes. We expect to continue to
economically hedge our exposure to interest rate fluctuations in the future by entering into interest rate swap contracts.
We estimate that we will spend
in total approximately $20.2 million for the next dry-docking and classification surveys for our nine time charter vessels in our current fleet. As our fleet matures and expands, our dry-docking expenses will likely increase. Ongoing costs for
compliance with environmental regulations are primarily included as part of our dry-docking and society classification survey costs or are a component of our vessel operating expenses. We are not aware of any regulatory changes or environmental
liabilities that we anticipate will have a material impact on our current or future operations. There will be further costs related to voyages to and from the dry-docking yard that will depend on actual deviation from the vessel’s ordinary
trading area to dry-docking yard.
On January 10, 2017, the Partnership sold 2,500,000 common units in a public offering, raising approximately
$54.9 million in net proceeds.
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, raising approximately $48.6 million in net proceeds. On June 30, 2017, the Partnership issued and sold in a second private placement 1,666,667 additional Series A Preferred Units, raising approximately $38.8
million in net proceeds.
As of June 30, 2017, the Partnership had available liquidity of $69.5 million, which consisted of cash and cash
equivalents of $64.5 million and an undrawn revolving credit facility of $5.0 million.
On August 12, 2015, the Board authorized a program
for the Partnership to repurchase up to 666,667 of its common units. The board of directors of the General Partner concurrently authorized the General Partner to purchase up to 333,333 common units of the Partnership. On
34
August 9, 2017, the Board and the board of directors of the General Partner authorized a further extension of the program to August 31, 2018. As of December 31, 2016, the
Partnership and the General Partner had purchased 180,906 and 90,368 common units, respectively, pursuant to the program at an average purchase price of $12.71 per unit. As of June 30, 2017, no additional common units had been purchased by the
Partnership or the General Partner.
The consolidated financial statements have been prepared assuming that the Partnership will continue as a going
concern. As of June 30, 2017, the Partnership’s net current liabilities were $18.9 million. Included in current liabilities are short term loan obligations that mature before June 30, 2018 and are therefore, presented as current
debt.
The Partnership expects that its primary future sources of funds will be available cash, cash from operations, borrowings under any new loan
agreements and the proceeds of any equity financings. The Partnership believes that these sources of funds (assuming the current rates earned from existing charters) will be sufficient to cover operational cash outflows and ongoing obligations under
the Partnership’s financing commitments to pay loan interest and make scheduled loan repayments and to make distributions on its outstanding units. Accordingly, the Partnership believes that its current resources, including its current undrawn
revolving credit facilities of $35.0 million, are sufficient to meet working capital requirements for its current business for at least the next twelve months.
The following table summarizes our net cash flows from operating, investing and financing activities and our cash and cash equivalents for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
(U.S. Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
98,021
|
|
|
$
|
52,485
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(60,875
|
)
|
|
|
(521
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
(344
|
)
|
|
|
(49,893
|
)
|
|
Effect of exchange rate changes on cash
|
|
|
35
|
|
|
|
23
|
|
|
Net increase in cash and cash equivalents
|
|
|
36,837
|
|
|
|
2,094
|
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
27,664
|
|
|
|
23,573
|
|
|
Cash and cash equivalents at the end of the period
|
|
|
64,501
|
|
|
|
25,667
|
|
Net cash provided by operating activities
Net cash provided by operating activities increased by $45.6 million to $98.0 million in the six months ended June 30, 2017 compared to
$52.5 million in the six months ended June 30, 2016. This was mainly due to higher earnings from the
Raquel Knusten,
the
Tordis Knutsen
and the
Vigdis Knutsen
being included in our results of operations as of
December 1, 2016, March 1, 2017 and June 1, 2017, respectively, and a decrease of working capital mainly due to increased prepaid revenue from the charters. The increase was partially offset by increased drydocking expenditures
and loss of earnings for the scheduled drydocking of the
Windsor Knutsen
in first quarter of 2017.
Net cash used in investing activities
Net cash used in investing activities was $60.9 million in the six months ended June 30, 2017 compared to $0.5 million in the six
months ended June 30, 2016. Net cash used in investing activities in the six months ended June 30, 2016 was higher due to the acquisition of the
Tordis Knutsen
and the
Vigdis Knusten
on March 1, 2017 and June 1,
2017, respectively.
Net cash used in financing activities
Net cash used in financing activities during the six months ended June 30, 2017 of $0.3 million and mainly related to the following:
|
|
•
|
|
The net proceeds from a public offering of common units in January 2017 of $54.9 million;
|
|
|
•
|
|
The net proceeds from issuance of Series A Preferred Units of $87.4 million;
|
|
|
•
|
|
Proceeds of $100.0 million from the refinancing of the
Hilda Knutsen;
and
|
|
|
•
|
|
Proceeds from drawdowns under our revolving credit facility of $30.0 million.
|
35
This was offset by the following;
|
|
•
|
|
Repayment of long-term debt of $167.5 million, of which $75.6 million was repaid in connection with refinancing of the
Hilda Knutsen
;
|
|
|
•
|
|
Repayment of long-term debt from related parties of $70.7 million; and
|
|
|
•
|
|
Payment of cash distributions of $33.4 million.
|
Net cash used in financing activities during the six
months ended June 30, 2016 of $49.9 million mainly related to repayment of long-term debt of $24.6 million and payment of cash distributions of $30.1 million partially offset by a $5.0 million drawdown under our revolving credit facility.
Borrowing Activities
Long-Term Debt
As of June 30, 2017 and December 31, 2016, the Partnership had the following debt amounts outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in
thousands)
|
|
Vessel
|
|
June 30, 2017
|
|
|
December 31,
2016
|
|
|
$220 million loan facility
|
|
Windsor Knutsen, Bodil Knutsen, Carmen Knutsen
|
|
$
|
172,857
|
|
|
$
|
180,714
|
|
|
$35 million revolving credit facility
|
|
Windsor Knutsen, Bodil Knutsen, Carmen Knutsen
|
|
|
30,000
|
|
|
|
25,000
|
|
|
$140 million loan facility
|
|
Fortaleza Knutsen & Recife Knutsen
|
|
|
113,750
|
|
|
|
118,125
|
|
|
$117 million loan facility
|
|
Hilda Knutsen
|
|
|
—
|
|
|
|
76,871
|
|
|
$117 million loan facility
|
|
Torill Knutsen
|
|
|
75,641
|
|
|
|
78,105
|
|
|
$172.5 million loan facility
|
|
Dan Cisne, Dan Sabia
|
|
|
95,939
|
|
|
|
100,539
|
|
|
$77.5 million loan facility
|
|
Ingrid Knutsen
|
|
|
64,368
|
|
|
|
67,652
|
|
|
$74.5 million loan facility
|
|
Raquel Knutsen
|
|
|
71,028
|
|
|
|
73,643
|
|
|
$25 million Seller’s Credit and Seller’s Loan
|
|
Raquel Knutsen
|
|
|
—
|
|
|
|
25,000
|
|
|
$114.4 million loan facility
|
|
Tordis Knutsen
|
|
|
93,581
|
|
|
|
—
|
|
|
$114.4 million loan facility
|
|
Vigdis Knutsen
|
|
|
94,846
|
|
|
|
—
|
|
|
$100 million loan facility
|
|
Hilda Knutsen
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
912,010
|
|
|
|
745,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current installments
|
|
|
|
|
66,661
|
|
|
|
60,314
|
|
|
|
|
|
|
Less: unamortized deferred loan issuance costs
|
|
|
1,643
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
65,018
|
|
|
|
58,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due after one year
|
|
|
845,350
|
|
|
|
685,335
|
|
|
Less: unamortized deferred loan issuance costs
|
|
|
4,468
|
|
|
|
2,673
|
|
|
Less: $25 million Seller’s Credit and Seller’s Loan
|
|
|
—
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current installments, Seller’s Credit and Seller’s
Loan and unamortized deferred loan issuance costs
|
|
$
|
840,882
|
|
|
|
657,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The Partnership’s outstanding debt of $912.0 million as of June 30, 2017 is repayable as follows:
|
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
Period
repayment
|
|
|
Balloon
repayment
|
|
|
Remainder of 2017
|
|
$
|
33,331
|
|
|
$
|
—
|
|
|
2018
|
|
|
66,303
|
|
|
|
86,677
|
|
|
2019
|
|
|
50,085
|
|
|
|
267,678
|
|
|
2020
|
|
|
39,153
|
|
|
|
—
|
|
|
2021
|
|
|
39,753
|
|
|
|
70,811
|
|
|
2022 and thereafter
|
|
|
85,507
|
|
|
|
172,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
314,132
|
|
|
$
|
597,878
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017, the interest rates on the Partnership’s loan agreements (other than tranche two of the $77.5
million loan facility) were the London Interbank Offered Rate (“LIBOR”) plus a fixed margin ranging from 1.9% to 2.5%. On the export credit loan of $44.6 million which is tranche two of the $77.5 million loan facility secured by the
Ingrid Knutsen
, the annual rate is 3.85% composed of a 2.5% bank facility rate plus a commission of 1.35% to the export credit guarantor. The guarantee commission of 1.35% is classified as other finance expense.
37
$220 Million Term Loan Facility and $35 Million Revolving Credit Facilities
In June 2014, the Partnership’s subsidiaries KNOT Shuttle Tankers 18 AS, KNOT Shuttle Tankers 17 AS and Knutsen Shuttle Tankers 13 AS entered into a
senior syndicate secured loan facility in an aggregate amount of $240 million (the “Senior Secured Loan Facility”) to repay existing debt under previous credit facilities and a $10.5 million seller’s credit from KNOT. The
Senior Secured Loan Facility consisted of (i) a $220 million term loan (the “Term Loan Facility”) and (ii) a $20 million revolving credit facility (the “Revolving Credit Facility”).
The Revolving Credit Facility terminates in June 2019, and bears interest at LIBOR plus a fixed margin of 2.125%, and has a commitment fee equal to 40% of the
margin of the Revolving Credit Facility calculated on the daily undrawn portion of the Revolving Credit Facility. The Term Loan Facility is repayable in quarterly installments over five years with a final balloon payment due at maturity at June
2019. The Term Loan Facility bears interest at LIBOR plus a margin of 2.125%.
On June 30, 2016, the Partnership’s subsidiaries KNOT Shuttle
Tankers 18 AS, KNOT Shuttle Tankers 17 AS and Knutsen Shuttle Tankers 13 AS, as borrowers, entered into an amended and restated senior secured credit facility (the “Amended Senior Secured Loan Facility”), which amended the Senior Secured
Loan Facility. The Amended Senior Secured Loan Facility includes a new revolving credit facility tranche of $15 million, bringing the total revolving credit commitments under the facility to $35 million. The new revolving credit facility
matures in June 2019, bears interest at LIBOR plus a fixed margin of 2.5% and has a commitment fee equal to 40% of the margin of the revolving facility tranche calculated on the daily undrawn portion of such tranche. The other material terms of the
Senior Secured Loan Facility remain unaltered.
The
Windsor Knutsen,
the
Bodil Knutsen
and the
Carmen Knutsen
, assignments of
earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Amended Senior Secured Loan Facility. The Amended Senior Secured Loan Facility is guaranteed by the Partnership and KNOT Shuttle Tankers AS, and secured by
vessel mortgages on the
Windsor Knutsen,
the
Bodil Knutsen
and the
Carmen Knutsen
.
The Amended Senior Secured Loan Facility contains
the following financial covenants:
|
|
•
|
|
The aggregate market value of the
Windsor Knutsen
,
Bodil Knutsen
and
Carmen Knutsen
shall not be less than 110% of the outstanding balance under the Amended Senior Secured Loan Facility for the
first two years, 120% for the third and fourth years, and 125% thereafter;
|
|
|
•
|
|
Positive working capital for the borrowers and the Partnership;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract;
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%; and
|
|
|
•
|
|
Minimum EBITDA to interest ratio for the Partnership of 2.50.
|
The Amended Senior Secured Loan Facility also
identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrowers and the guarantors were in
compliance with all covenants under this facility.
$100 Million Hilda Loan Facility
On May 26, 2017, the Partnership’s subsidiary, KNOT Shuttle Tankers 14 AS, which owns the vessel
Hilda Knutsen
, entered into a new $100
million senior secured term loan facility with Mitsubishi UFJ Lease & Finance (Hong Kong) Limited (the “New Hilda Facility”). The New Hilda Facility replaced the $117 million loan facility, which was due to be paid in full in
August 2018. The New Hilda Facility is repayable in twenty-eight (28) consecutive quarterly installments with a balloon payment of $58.5 million due at maturity. The New Hilda Facility bears interest at a rate per annum equal to LIBOR plus a
margin of 2.2%. The facility matures in 2024.
The Partnership and KNOT Shuttle Tankers AS are the sole guarantors. The New Hilda Facility contains the
following primary financial covenants:
|
|
•
|
|
Market value of the
Hilda Knutsen
shall not be less than 110% of the outstanding balance under the Hilda Facility for the first two years, 120% for the third and fourth year, and 125% thereafter;
|
|
|
•
|
|
Positive working capital of the borrower and the Partnership;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract;
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%; and
|
|
|
•
|
|
Minimum EBITDA to interest ratio for the Partnership of 2.50.
|
38
The New Hilda Facility also identifies various events that may trigger mandatory reduction, prepayment and
cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in compliance with all covenants under this facility.
$117 Million Torill Loan Facility
In November 2011, Knutsen Shuttle Tankers 15 AS, the subsidiary owning the
Torill Knutsen
, as the borrower, entered into a secured loan facility in an
aggregate amount of $117 million (the “Torill Facility”). The Torill Facility is repayable in quarterly installments over five years with a final balloon payment due at maturity in October 2018. The Torill Facility bears interest at
LIBOR plus a fixed margin of 2.5%. The facility is secured by a vessel mortgage on the
Torill Knutsen
. The
Torill Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the
Torill Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors. The Torill Facility contains the following primary financial covenants:
|
|
•
|
|
Market value of the
Torill Knutsen
shall not be less than 110% of the outstanding balance under the Torill Facility for the first two years, 120% for the third and fourth year, and 125% thereafter;
|
|
|
•
|
|
Positive working capital of the borrower and the Partnership;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract;
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%; and
|
|
|
•
|
|
Minimum EBITDA to interest ratio for the Partnership of 2.50.
|
The Torill Facility also identifies various
events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in compliance with all
covenants under this facility.
$140 Million Secured Loan Facility
In June 2014, the Partnership’s subsidiary Knutsen Shuttle Tankers XII KS, as the borrower, entered into a senior syndicate secured loan facility in the
amount of $140 million (the “New Fortaleza and Recife Facility”). The New Fortaleza and Recife Facility was drawn in November 2014 and replaced a $160 million loan facility previously secured by the
Fortaleza Knutsen
and
the
Recife Knutsen
. The New Fortaleza and Recife Facility is repayable in quarterly installments over five years with a final balloon payment due at maturity at June 2019. The facility bears interest at LIBOR plus a margin of 2.125%. The
Fortaleza Knutsen
and the
Recife Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the New Fortaleza and Recife Facility. The facility is guaranteed by the Partnership and
KNOT Shuttle Tankers AS and is secured by vessel mortgages on the
Fortaleza Knutsen
and the
Recife Knutsen
.
The New Fortaleza and Recife
Facility contains the following financial covenants:
|
|
•
|
|
The aggregate market value of the
Fortaleza Knutsen
and
Recife Knutsen
shall not be less than 110% of the outstanding balance under the New Fortaleza and Recife Facility for the first two years, 120% for
the third and fourth year, and 125% thereafter;
|
|
|
•
|
|
Positive working capital of the borrower and the Partnership;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract;
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%; and
|
|
|
•
|
|
Minimum EBITDA to interest ratio for the Partnership of 2.50.
|
The New Fortaleza and Recife Facility also
identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in
compliance with all covenants under this facility.
$172.5 Million Secured Loan Facility
In April 2014, KNOT Shuttle Tankers 20 AS and KNOT Shuttle Tankers 21 AS, the subsidiaries owning the
Dan Cisne
and
Dan Sabia
, as the borrowers,
entered into a $172.5 million senior secured loan facility. In connection with the Partnership’s acquisition of the
Dan Cisne
, in December 2014, the $172.5 million senior secured loan facility was split into a tranche related
to the
Dan Cisne
(the “Dan Cisne Facility”) and a tranche related to
Dan Sabia
(the “Dan Sabia Facility”).
39
The Dan Cisne Facility and the Dan Sabia Facility are guaranteed by the Partnership and secured by a vessel
mortgage on the
Dan Cisne
and
Dan Sabia
. The Dan Cisne Facility and the Dan Sabia Facility bear interest at LIBOR plus a margin of 2.4% and are repayable in semiannual installments with a final balloon payment due at maturity at
September 2023 and January 2024, respectively.
The facilities contain the following financial covenants:
|
|
•
|
|
Market value of each of the
Dan Cisne
and
Dan Sabia
shall not be less than 100% of the outstanding balance under the Dan Cisne Facility and Dan Sabia Facility, respectively, for the first three years, and
125% thereafter;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract;
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%.
|
The facility also identifies various events that may
trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrowers and the guarantor were in compliance with all covenants under
this facility.
$77.5 Million Secured Loan Facility
In June 2012, Knutsen NYK Shuttle Tankers 16 AS, the subsidiary owning the
Ingrid Knutsen
, as the borrower, entered into a secured loan facility in an
aggregate amount of $90.0 million (the “Ingrid Facility”). The Ingrid Facility includes two tranches. Tranche one is a commercial bank loan of $22.4 million, repayable in semi-annual installments with a final balloon payment due
at maturity in December 2018. Tranche one bears interest at LIBOR, plus a margin of 2.25%. Tranche two is an export credit loan of $55.1 million, repayable in semi-annual installments and maturing in November 2025.
Tranche two bears interest at an annual fixed rate of 3.85%, composed of a 2.5% bank facility rate plus a commission of 1.35% to the export credit guarantor.
The facility is secured by a vessel mortgage on the
Ingrid Knutsen
. The
Ingrid Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Ingrid Facility. The Partnership and KNOT
Shuttle Tankers AS are the sole guarantors.
The Ingrid Facility contains the following financial covenants:
|
|
•
|
|
Market value of the
Ingrid Knutsen
shall not be less than 125% of the outstanding balance under the Ingrid Facility;
|
|
|
•
|
|
Positive working capital of the borrower and the Partnership;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract;
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%; and
|
|
|
•
|
|
Minimum EBITDA to interest ratio for the Partnership of 2.50.
|
The Ingrid Facility also identifies various
events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in compliance with all
covenants under this facility.
$74.5 Million Secured Loan Facility
In December 2014, Knutsen Shuttle Tankers 19 AS, the subsidiary owning the
Raquel Knutsen
, as the borrower, entered into a secured loan facility in an
aggregate amount of $90.0 million (the “Raquel Facility”). The Raquel Facility is repayable in quarterly installments with a final balloon payment of $30.5 million due at maturity in March 2025. The Raquel Facility bears interest
at an annual rate equal to LIBOR plus a margin of 2.0%. The facility is secured by a vessel mortgage on the
Raquel Knutsen
. The
Raquel Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as
collateral for the Raquel Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors.
The Raquel Facility contains the following
financial covenants:
|
|
•
|
|
Market value of the
Raquel Knutsen
shall not be less than 100% of the of the outstanding balance under the Raquel Facility for the first three years, and 125% thereafter;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract; and
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%.
|
40
The Raquel Facility also identifies various events that may trigger mandatory reduction, prepayment and
cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in compliance with all covenants under this facility.
$25 Million Seller’s Credit and Seller’s Loan
As part of financing for the purchase of the
Raquel Knutsen
, on December 1, 2016 KNOT provided a $13.0 million seller’s credit (the
“Seller’s Credit”) and a $12.0 million seller’s loan (the “Seller’s Loan”), each of which was guaranteed by the Partnership, had a maturity date of December 2021 and bore interest at LIBOR plus a fixed margin
of 4.5%. Accrued interest on the Seller’s Credit and the Seller’s Loan accumulated and was capitalized. On January 13, 2017, the Seller’s Credit and the Seller’s Loan were repaid in full.
$114.4 Million Tordis Loan Facility
In April 2015, KNOT Shuttle Tankers 24 AS, the subsidiary owning the
Tordis Knutsen
, as the borrower, entered into a secured loan facility (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%. The facility is secured by a vessel mortgage on the
Tordis Knutsen
. The
Tordis Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Tordis Facility. The
Partnership and KNOT Shuttle Tankers AS are the sole guarantors.
The Tordis Facility contains the following financial covenants:
|
|
•
|
|
Aggregate market value of the
Tordis Knutsen
and the
Vigdis Knutsen
shall not be less than 130% of the aggregate outstanding balance under the Tordis Facility and the Vigdis Facility (as defined below) at
any time;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract; and
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%.
|
The Tordis Facility also identifies various events that
may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in compliance with all covenants
under this facility.
$114.4 Million Vigdis Loan Facility
In April 2015, KNOT Shuttle Tankers 25 AS, the subsidiary owning the
Vigdis Knutsen
, as the borrower, entered into a secured loan facility (the
“Vigdis Facility”). The Vigdis Facility is repayable in quarterly installments with a final balloon payment of $70.8 million due at maturity in February 2022. The Vigdis Facility bears interest at an annual rate equal to LIBOR plus a
margin of 1.9%. The facility is secured by a vessel mortgage on the
Vigdis Knutsen
. The
Vigdis Knutsen
, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Vigdis Facility. The
Partnership and KNOT Shuttle Tankers AS are the sole guarantors.
The Vigdis Facility contains the following financial covenants:
|
|
•
|
|
Aggregate market value of the
Tordis Knutsen
and the
Vigdis Knutsen
shall not be less than 130% of the aggregate outstanding balance under the Tordis Facility and the Vigdis Facility at any time;
|
|
|
•
|
|
Minimum liquidity of the Partnership of $20 million plus increments of $1 million for each additional vessel acquired by the Partnership and $1.5 million for each owned vessel with less than 12 months
remaining tenor on its employment contract; and
|
|
|
•
|
|
Minimum book equity ratio for the Partnership of 30%.
|
The Vigdis Facility also identifies various events that
may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2017, the borrower and the guarantors were in compliance with all covenants
under this facility.
$25.0 Million Revolving Credit Facility
On August 9, 2017, the Partnership entered into an agreement with NTT Finance Corporation for an unsecured revolving credit facility of $25 million. The
facility will mature in August 2019, bear interest at LIBOR plus a margin of 1.8% and have a commitment fee of 0.5% on the undrawn portion of the facility. The revolving credit facility also contains certain customary events of default. Closing the
facility is expected to occur by the end of August 2017.
41
Derivative Instruments and Hedging Activities
We use derivative instruments to reduce the risks associated with fluctuations in interest rates. We have a portfolio of interest rate swap contracts that
exchange or swap floating rate interest to fixed rates, which, from a financial perspective, hedges our obligations to make payments based on floating interest rates. As of June 30, 2017, our net exposure to floating interest rate fluctuations
on our outstanding debt was approximately $266.2 million based on total interest bearing debt outstanding of $912.0 million, less interest rate swaps of $536.7 million, less a 3.85% fixed rate export credit loan of $44.6 million and less cash and
cash equivalents of $64.5 million. Our interest rate swap contracts mature between April 2018 and February 2026. Under the terms of the interest rate swap agreements, we will receive from the counterparty interest on the notional amount based on
three-month and six-month LIBOR and will pay to the counterparty a fixed rate. For the interest rate swap agreements above, we will pay to the counterparty a weighted average interest rate of 1.65%.
We enter into foreign exchange forward contracts in order to manage our exposure to the risk of movements in foreign currency exchange rate fluctuations. As
of June 30, 2017, the total contract amount in foreign currency of our outstanding foreign exchange forward contracts that were entered into to economically hedge our outstanding future payments in currencies other than the U.S. Dollar was
NOK 332.5 million. We do not apply hedge accounting for derivative instruments.
Contractual Obligations
The following table summarizes our long-term contractual obligations as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
(U.S. Dollars in thousands)
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
More than
5 Years
|
|
|
Long-term debt obligations
(including interest)(1)
|
|
$
|
1,033,576
|
|
|
$
|
100,316
|
|
|
$
|
504,235
|
|
|
$
|
246,311
|
|
|
$
|
182,715
|
|
|
Total
|
|
$
|
1,033,576
|
|
|
$
|
100,316
|
|
|
$
|
504,235
|
|
|
$
|
246,311
|
|
|
$
|
182,715
|
|
|
(1)
|
The long-term debt obligations have been calculated assuming interest rates based on the 6-month LIBOR as of June 30, 2017, plus the applicable margin for all periods presented.
|
Off-Balance Sheet Arrangements
Currently, we do not have
any off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of the unaudited condensed consolidated interim financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and liabilities. We base these estimates and assumptions on historical experience and on various other information and assumptions that we believe
to be reasonable. Our critical accounting estimates are important to the portrayal of both our financial condition and results of operations and require us to make subjective or complex assumptions or estimates about matters that are uncertain. For
a description of our material accounting policies that involve higher degree of judgment, please read Note 2 – Summary of Significant Accounting Policies of our consolidate financial statement included in our 2016 20-F filed with the Securities
and Exchange Commission (“SEC”).
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including interest rate, foreign currency exchange and concentration of credit risks. Historically, we have entered
into certain derivative instruments and contracts to maintain the desired level of exposure arising from interest rate and certain foreign exchange risks. Our policy is to economically hedge our exposure to risks, where possible, within boundaries
deemed appropriate by management.
Interest Rate Risks
A portion of our debt obligations and surplus funds placed with financial institutions are subject to movements in interest rates. It is our policy to obtain
the most favorable interest rates available without increasing our foreign currency exposure. In keeping with this, our surplus funds may in the future be placed in fixed deposits with reputable financial institutions which yield better returns than
bank deposits. The deposits generally have short-term maturities so as to provide us with the flexibility to meet working capital and capital investments.
We have historically used interest rate swap contracts to manage our exposure to interest rate risks. Interest rate swap contracts were used to convert
floating rate debt obligations based on LIBOR to a fixed rate in order to achieve an overall desired position of fixed and floating rate debt. The extent to which interest rate swap contracts are used is determined by reference to our net debt
exposure and our views regarding
42
future interest rates. Our interest rate swap contracts do not qualify for hedge accounting, and movements in their fair values are reflected in the statements of operations under “Realized
and unrealized gain (loss) on derivative instruments.” Interest rate swap contracts that have a positive fair value are recorded as “Other current assets,” while swaps with a negative fair value are recorded as “Derivative
liabilities.”
As of June 30, 2017, we were party to interest rate swap contracts with a combined notional amount of approximately
$536.7 million. Under the terms of the interest rate swap contracts, we receive LIBOR-based variable interest rate payments and make fixed interest rate payments at fixed rates between 1.25% per annum and 2.49% per annum for all
periods. The interest rate swap contracts mature between March 2018 and March 2025. The notional amount and fair value of our interest rate swap contracts recognized as net derivative liabilities as of June 30, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
(U.S. Dollars in thousands)
|
|
Notional Amount
|
|
|
Fair Value
(asset)
|
|
|
Interest rate swap contracts
|
|
$
|
536,649
|
|
|
$
|
2,158
|
|
As of June 30, 2017, our net exposure to floating interest rate fluctuations on its outstanding debt was approximately
$266.2 million, based on total net interest bearing debt of approximately $912.0 million less the notional amount of our floating to fixed interest rate swaps of $536.7 million, less a 3.85% fixed rate export credit loan of $44.6
million and less cash and cash equivalents of $64.5 million. A 1% change in short-term interest rates would result in an increase or decrease to our interest expense of approximately $2.7 million on an annual basis as of June 30,
2017.
Foreign Currency Fluctuation Risks
We
and our subsidiaries utilize the U.S. Dollar as our functional and reporting currency because all of our revenues and the majority of our expenditures, including the majority of our investments in vessels and our financing transactions, are
denominated in U.S. Dollars. We could, however, earn revenue in other currencies and we currently incur a portion of our expenses in other currencies. Therefore, there is a risk that currency fluctuations could have an adverse effect on the value of
our cash flows.
Our foreign currency risk arises from:
|
|
•
|
|
the measurement of monetary assets and liabilities denominated in foreign currencies converted to U.S. Dollars, with the resulting gain or loss recorded as “Foreign exchange gain/(loss);” and
|
|
|
•
|
|
the impact of fluctuations in exchange rates on the reported amounts of our revenues, if any, and expenses that are denominated in foreign currencies.
|
As of June 30, 2017 we had entered into foreign exchange forward contracts, selling a total notional amount of $40.0 million against NOK at an
average exchange rate of NOK 8.31 per 1.0 U.S. Dollar, which are economic hedges for certain vessel operating expenses and general expenses in NOK. We did not apply hedge accounting to our foreign exchange forward contracts.
Concentration of Credit Risk
The market for our
services is the offshore oil transportation industry, and the customers consist primarily of major oil and gas companies, independent oil and gas producers and government-owned oil companies. As of June 30, 2017 and December 31, 2017, six
customers accounted for substantially all of our revenues. Ongoing credit evaluations of our customers are performed and generally do not require collateral in our business agreements. Typically, under our time charters and bareboat charters, the
customer pays for the month’s charter the first day of each month, which reduces our level of credit risk. Provisions for potential credit losses are maintained when necessary.
We have bank deposits that expose us to credit risk arising from possible default by the counterparty. We manage the risk by using credit-worthy financial
institutions.
Retained Risk
For a
description of our insurance coverage, including the risks retained by us related to our insurance policies, please read “Item 4. Information on the Partnership – Business Overview – Risk of Loss, Insurance and Risk Management”
in our 2016 20-F.
43
Risk Factors
In addition to the other information set forth below and elsewhere in this Report on Form 6-K, you should carefully consider the risk factors discussed in
“Item 3. Key Information—Risk Factors” in our 2016 20-F, which could materially affect our business, financial condition or results of operations.
There are proposed modifications to the Norwegian Tonnage Tax regime that could result in a material increase in our income taxes and a reduction in the
amount of cash available for distribution.
The Norwegian government is in negotiations with the EFTA Surveillance Authority to extend the
effective date of the Norwegian Tonnage Tax regime (the “NTT”). Pursuant to those negotiations, Norway has proposed restrictions that would eliminate the ability of companies that own vessels under certain bareboat charters to qualify
for the NTT. Companies that no longer qualify for the NTT would instead be subject to Norwegian corporate income tax.
Subsidiaries of the
Partnership collectively own four vessels under bareboat charters. Under the currently proposed changes to the NTT, the subsidiaries that own those vessels would no longer qualify for the NTT and would instead be subject to Norwegian corporate
income tax, potentially as of January 1, 2018. The Partnership is evaluating potential alternatives that would avoid any of its subsidiaries being disqualified from the NTT. However, until any changes to the NTT are finalized, the Partnership
can make no assurances that it can avoid the disqualification of certain of its subsidiaries from the NTT.
In the event certain subsidiaries of the
Partnership are disqualified from the NTT and become subject to Norwegian corporate income tax, such subsidiaries should be able to reduce the amount of their income subject to Norwegian corporate income tax through depreciation deductions on their
vessels. However such deductions will decline over time. Accordingly, there could be a resulting increase in the Partnership’s income tax expense in several years that would reduce the amount of cash available for distribution.
44
FORWARD-LOOKING STATEMENTS
This Report on Form 6-K contains certain forward-looking statements concerning future events and our operations, performance and financial condition and
assumptions related thereto. 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 our 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;
|
|
|
•
|
|
KNOT’s and our ability to build shuttle tankers and the timing of the delivery and acceptance of any such vessels by their respective charterers;
|
|
|
•
|
|
forecasts of our ability to make or increase distributions on our common units and to make distributions on the Series A Preferred Units and the amount of any such distributions;
|
|
|
•
|
|
our ability to integrate and realize the expected benefits from acquisitions, including the acquisition of KNOT 25 and the intended acquisition of KNOT 26;
|
|
|
•
|
|
our 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;
|
|
|
•
|
|
general market conditions, including fluctuations in hire rates and vessel values;
|
|
|
•
|
|
changes in our operating expenses, including drydocking and insurance costs and bunker prices;
|
|
|
•
|
|
our future financial condition or results of operations and future revenues and expenses;
|
|
|
•
|
|
the repayment of debt and settling of any interest rate swaps;
|
|
|
•
|
|
our ability to make additional borrowings and to access debt and equity markets;
|
|
|
•
|
|
planned capital expenditures and availability of capital resources to fund capital expenditures;
|
|
|
•
|
|
our ability to maintain long-term relationships with major users of shuttle tonnage;
|
|
|
•
|
|
our ability to leverage KNOT’s relationships and reputation in the shipping industry;
|
|
|
•
|
|
our ability to purchase vessels from KNOT in the future;
|
|
|
•
|
|
our continued ability to enter into long-term charters, which we define as charters of five years or more;
|
|
|
•
|
|
our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term charter;
|
|
|
•
|
|
the financial condition of our 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 our vessels;
|
|
|
•
|
|
our ability to compete successfully for future chartering and newbuild opportunities;
|
|
|
•
|
|
acceptance of a vessel by its charterer;
|
|
|
•
|
|
termination dates and extensions of charters;
|
45
|
|
•
|
|
the expected cost of, and our ability to comply with, governmental regulations, maritime self-regulatory organization standards, as well as standard regulations imposed by our charterers applicable to our business;
|
|
|
•
|
|
availability of skilled labor, vessel crews and management;
|
|
|
•
|
|
our general and administrative expenses and fees and expenses payable under the technical management agreements, management and administration agreements and the administrative services agreement;
|
|
|
•
|
|
modifications to the Norwegian Tonnage Tax regime;
|
|
|
•
|
|
the anticipated taxation of KNOT Offshore Partners and distributions to our unitholders;
|
|
|
•
|
|
estimated future maintenance and replacement capital expenditures;
|
|
|
•
|
|
our 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 our securities in the public market;
|
|
|
•
|
|
our 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 we file with the SEC.
|
Forward-looking statements in this Report on Form 6-K are based upon management’s current plans, expectations, estimates, assumptions and beliefs
concerning future events impacting us and therefore involve a number of risks and uncertainties, including those risks discussed in this
Form 6-K
and our 2016 20-F. New factors emerge from time to time,
and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our 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. We do not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in
events, conditions or circumstances on which any such statement is based.
46
EXHIBITS
The following exhibits are filed as part of this report:
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
4.1
|
|
Accession Letter, dated June 1, 2017, among Knutsen NYK Offshore Tankers AS, KNOT Offshore Partners LP, KNOT Shuttle Tankers AS, KNOT Shuttle Tankers 24 AS, KNOT Shuttle Tankers 25 AS, KNOT Shuttle Tankers 26 AS and DNB Bank
ASA.
|
|
|
|
|
4.2
|
|
Ship Management Agreement for the Vigdis Knutsen, dated July 22, 2016 between KNOT Shuttle Tankers 25 AS and KNOT Management AS, as amended.
|
|
|
|
|
4.3
|
|
Loan Agreement, dated March 31, 2017 among Knutsen Shuttle Tankers 14 AS, as borrower, and Mitsubishi UFJ Lease & Finance (Hong Kong) Limited, as lender.
|
|
|
|
|
4.4
|
|
Addendum, dated May 30, 2017, to Share Purchase Agreement, dated May 16, 2017, between Knutsen NYK Offshore Tankers AS and KNOT Shuttle Tankers AS.
|
|
|
|
|
4.5
|
|
Share Purchase Agreement, dated August 9, 2017, between Knutsen NYK Offshore Tankers AS and KNOT Shuttle Tankers AS.
|
|
|
|
|
101
|
|
The following financial information from KNOT Offshore Partners LP’s Report on Form 6-K for the quarter ended June 30, 2017
formatted in XBRL (eXtensible Business Reporting Language):
(i) Unaudited Condensed
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016;
(ii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016;
(iii) Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and
December 31, 2016;
(iv) Unaudited Condensed Consolidated Statements of Changes
in Partners’ Capital for the Six Months Ended June 30, 2017 and 2016;
(v)
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016; and
(vi) Notes to Unaudited Condensed Consolidated Financial Statements.
|
47
