ABERDEEN, Scotland--(BUSINESS WIRE)--Financial Highlights

For the three months ended December 31, 2020, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

• Generated total revenues of $69.9 million, operating income of $30.4 million and net income of $24.6 million.
• Generated Adjusted EBITDA of $52.9 million (1)
• Generated distributable cash flow of $28.6 million (1)
• Reported a distribution coverage ratio of 1.58 (2)

Other Partnership Highlights and Events

• Fleet operated with 98.6% utilization for scheduled operations.
• The Partnership’s operations remained materially unaffected by the COVID-19 outbreak to date.
• On November 20, 2020, the Partnership entered into a new and additional $25 million unsecured revolving credit facility to further increase its available liquidity.
• The Partnership secured new three-year fixed time charter contracts for the vessels, Tordis Knutsen, Vigdis Knutsen and Lena Knutsen to commence in 2023.
• On December 30, 2020, the Partnership, through its wholly-owned subsidiary Knutsen Shuttle Tankers 19 AS, which owned the Raquel Knutsen, agreed to enter into a 10-year sale and leaseback agreement in respect of the Raquel Knutsen.
• On December 31, 2020, the Partnership completed the acquisition from Knutsen NYK Offshore Tankers AS (“Knutsen NYK”) of the entity that owns the shuttle tanker, Tove Knutsen. The purchase price was $117.8 million, less $93.1 million of outstanding indebtedness related to the Tove Knutsen, plus approximately $0.8 million for certain capitalized fees related to the financing of the Tove Knutsen, minus other purchase price adjustments of $3.6 million. The Tove Knutsen is operating in Brazil on a fixed 7-year time charter with Equinor Shipping Inc.
• On February 11, 2021, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended December 31, 2020 to all common unitholders of record on January 29, 2021. On February 11, 2021, the Partnership paid a cash distribution to holders of Series A Convertible Preferred Units (“Series A Preferred Units”) with respect to the quarter ended December 31, 2020 in an aggregate amount equal to $1.8 million.
• The Windsor Knutsen was redelivered to the Partnership from Shell on December 7, 2020. The Partnership has subsequently agreed on the commercial terms for an expected one-year fixed time charter contract for the Windsor Knutsen (with potential options to extend the charter by one one-year period and then one six-month period) with a major oil company to commence in the third quarter of 2021. In December 2020, the Windsor Knutsen reported a crack in its main engine block and was placed off-hire. The Partnership’s hull and machinery insurance is expected to cover the cost of repairs and loss of hire insurance is expected to provide income at approximately the level earned during the vessel’s prior long-term charter, excepting a 14-day deductible period under the policy, until such time as the vessel is repaired and fully operational, which is expected to be in or around June 2021. The incident and the repair are not expected to result in any future loss of hire.
• On March 9, 2021, the charterer of the Bodil Knutsen, Equinor ASA (“Equinor”) did not notify the Partnership by this due date of its intention to exercise its option to extend the time charter for the vessel. Based on a redelivery notice received, the charter is currently expected to expire on April 9, 2021. As a result, the Partnership has already begun marketing the vessel for long-term employment and intends for the vessel to be utilised in any intervening period in the short-term market, including in the contract of affreightment (‘COA’) market in the North Sea.

Financial Results Overview

Total revenues were $69.9 million for the three months ended December 31, 2020 (the “fourth quarter”), compared to $71.3 million for the three months ended September 30, 2020 (the “third quarter”). The decrease was mainly related to lower utilization of the fleet due to redelivery of Windsor Knutsen from Shell on December 7, 2020.

Vessel operating expenses for the fourth quarter of 2020 were $15.6 million, a decrease of $1.1 million from $16.7 million in the third quarter of 2020. The decrease is mainly due to lower operating costs on average for the fleet in the fourth quarter.

¹ EBITDA, Adjusted EBITDA and distributable cash flow are non-GAAP financial measures used by management and external users of the Partnership’s financial statements. Please see Appendix A for definitions of EBITDA, Adjusted EBITDA and distributable cash flow and a reconciliation to net income, the most directly comparable GAAP financial measure.
² Distribution coverage ratio is equal to distributable cash flow divided by distributions declared for the period presented

General and administrative expenses were $1.4 million for the fourth quarter compared to $1.3 million in the third quarter.

Depreciation was $22.5 million for the fourth quarter, which is unchanged from the third quarter.

As a result, operating income for the fourth quarter was $30.4 million, compared to $30.9 million in the third quarter.

Interest expense for the fourth quarter was $6.1 million, a decrease of $0.5 million from $6.6 million for the third quarter. The decrease was due to a combination of lower average LIBOR rates and decreased debt leverage for all credit facilities.

Realized and unrealized gain on derivative instruments was $0.2 million in the fourth quarter, compared to $0.9 million in the third quarter. The unrealized non-cash element of the mark-to-market gain was $2.3 million for the fourth quarter of 2020, compared to $2.4 million for the third quarter of 2020. All of the unrealized gain for the fourth quarter of 2020 is related to a mark-to-market gain on interest rate swaps.

As a result, net income for the fourth quarter of 2020 was $24.6 million compared to $25.1 million for the third quarter of 2020.

Net income for the fourth quarter of 2020 increased by $0.8 million to $24.6 million from net income of $23.8 million for the three months ended December 31, 2019. Operating income for the fourth quarter of 2020 decreased by $0.6 million to $30.4 million, compared to operating income of $31.0 million in the fourth quarter of 2019, mainly due to lower utilization of the fleet due to the redelivery of the Windsor Knutsen from Shell in the fourth quarter of 2020 and higher operating costs on average for the fleet. These factors were partially offset by full earnings from the Raquel Knutsen in the fourth quarter of 2020 compared to the fourth quarter of 2019 when the vessel had commenced its scheduled drydocking. Total finance expense for the fourth quarter of 2020 decreased by $1.5 million to $5.8 million, compared to finance expense of $7.3 million for the fourth quarter of 2019. The decrease was mainly due to lower average interest costs due to a decrease in the US LIBOR rate and lower unrealized gain on derivative instruments.

Distributable cash flow was $28.6 million for the fourth quarter of 2020, compared to $28.9 million for the third quarter of 2020. The decrease in distributable cash flow was mainly due to lower utilization of the fleet and an increased realized loss on derivative instruments, offset by decreased operating and interest expenses. The distribution declared for the fourth quarter of 2020 was $0.52 per common unit, equivalent to an annualized distribution of $2.08.

COVID-19

The outbreak of the coronavirus (“COVID-19”) continues to negatively affect global economic activity, including the demand for oil and oil shipping, which may materially impact the Partnership’s operations and the operations of its customers and suppliers, although progress in vaccinations brings cautious optimism.

The Partnership’s operations have not been materially affected by the COVID-19 outbreak to date, although the ultimate length and severity of the current pandemic and its potential impact on the Partnership’s business, financial condition and results of operations remains uncertain at this time. The virus outbreak has increased uncertainty in a number of areas of the Partnership’s business, including operational, commercial and financial activities. Large scale distribution of vaccines seems likely to mitigate some of these uncertainties during 2021, but it remains too early to definitively judge the speed, scale and overall effect of vaccination efforts.

The Partnership’s focus continues to be on ensuring the health and safety of its employees while providing safe and reliable operations for its customers. All crew on board and staff onshore continue to take precautions with respect to social distancing, personal hygiene and other measures, following all local guidelines and regulations to minimize the spread of the virus. To date, the Partnership has not had any material service interruptions on its time-chartered vessels as a result of COVID-19.

Due to continuing international travel restrictions, there remain challenges in respect of crew changes and maintenance support; however the Partnership has been able to carry out crew changes in both Europe and Brazil. Crew changes continue to occur with regularity and maintenance has continued to be performed, or in some cases postponed, where it is safe and possible to do so. The majority of such difficulties continue to result from either local lockdowns or transportation or logistical restrictions. The Partnership has incurred higher crewing expenses to ensure appropriate mitigation actions are in place to minimize risks of outbreaks, but such overall crewing costs have remained within budget.

The closure of, or restricted access to, ports and terminals and passenger air travel in regions affected by the virus may lead to further operational impacts that could result in higher costs. It is possible that an outbreak onboard a vessel could prevent the Partnership from meeting its obligations under a charter, resulting in an off-hire claim and loss of revenue. Any outbreak of COVID-19 on board one of the Partnership’s vessels or that affects any of the Partnership’s main suppliers could cause an inability to replace critical supplies or parts, maintain adequate crewing or fulfil the Partnership’s obligations under its time charter contracts which in turn could result in off-hire or claims for the impacted period.

COVID-19 placed downward pressure on economic activity and energy demand during 2020, and there remains significant uncertainty moving into 2021. Although oil prices have rebounded back above $50/bbl and we expect this to continue through 2021, demand for oil remains below pre-COVID levels. This, together with announced delays in new capital expenditure by many oil majors in 2020 has had a negative impact on the demand for shuttle tankers in the short term and, given the uncertainty around the continuation of the COVID-19 situation, this dampened demand could persist. This could affect the number of new, long-term offshore projects and the overall outlook for oil production, which could eventually and in turn impact the demand and pricing for shuttle tankers. Furthermore, the Partnership may be unable to re-charter its vessels at attractive rates in the future, particularly for vessels that are coming off charter in the next one to two years. Notwithstanding these challenges, the Partnership remains confident in the mid to long term growth opportunities for the shuttle tanker market and that once economic activity begins to move back closer towards pre-COVID levels the Partnership will be well-placed to prosper.

Although the Partnership is exposed to the uncertainty of cash flows from its time charter contracts arising from the credit risk associated with the individual charterers, the Partnership believes that its charter contracts, all with subsidiaries of national oil companies and oil majors, largely insulates the Partnership from this risk in most scenarios. Notwithstanding, any extended period of non-payment or idle time between charters caused by issues related to COVID-19 or otherwise could adversely affect the Partnership’s future liquidity, results of operations and cash flows. The Partnership has not so far experienced any reduced or non-payments for obligations under the Partnership’s time charter contracts and the Partnership has not provided concessions or made changes to the terms of payment for customers.

COVID-19 has had a sustained impact on global capital markets and the responses of governments around the world to manage the impact of the virus have led to lower interest rates and volatility in the prices of equities, bonds, commodities and their respective derivatives. The Partnership’s common unit price remains lower than the price at the start of 2020, mainly due to the impact of COVID-19 on the wider economy and sentiment in the energy and shipping sectors. In these current market conditions with lower unit prices, issuing new common equity remains a less viable and more expensive option for accessing liquidity. The Partnership has two tranches of debt maturing in August and November 2021 but expects to be able to obtain refinancing for this debt, and other debt in the future, on satisfactory terms. However, if the refinancing does not occur the Partnership may not have sufficient funds or other assets to satisfy all of its obligations, which would have a material adverse effect on its business, results of operations and financial condition.

Operational Review

The Partnership’s vessels operated throughout the fourth quarter of 2020 with 98.6% utilization for scheduled operations. All charter payments in respect of the quarter were received in accordance with the Partnership’s charter contracts.

The Windsor Knutsen was redelivered from the charterer on December 7, 2020. It was expected that the vessel would then undertake a number of short-term voyage contracts when the vessel reported a crack in its main engine block on December 12, 2020 and the vessel was placed off-hire. The Partnership’s hull and machinery insurance is expected to cover the cost of repairs and loss of hire insurance is expected to provide income at approximately the level earned during the vessel’s prior long-term charter, excepting a 14-day deductible period under the policy, up to and until the vessel is ready to return to service. Based on lead times for the manufacturing of necessary parts, logistics and the repair itself, the Partnership currently anticipates that the vessel will return to service in or around June 2021.

The Partnership has agreed on the commercial terms for an expected one-year fixed time charter contract for the Windsor Knutsen (with potential options to extend the charter by one one-year period and then one six-month period) with a major oil company to commence in the third quarter of 2021.

On December 8, 2020, the Partnership secured new three-year fixed contracts for the vessels, Tordis Knutsen, Vigdis Knutsen and Lena Knutsen, with a major oil company. The commencement of these new time charters range between May and December 2023, where it is the owner’s choice which of the vessels will be put forward and used under each charter. All three charters are for fixed periods of three years, however the third charter grants cancellation options to the charterer at the end of the first and the second years with penalties payable to the Partnership if exercised. The vessels will now be marketed for short to mid-term charter business in the intervening period between the end of the vessels’ current fixed charters (in 2022) and the commencement of the abovementioned new fixed charters (in 2023), which period on average is currently estimated to be 15 months for each vessel.

On March 9, 2021, the charterer of the Bodil Knutsen, Equinor did not notify the Partnership by this due date of its intention to exercise its option to extend the time charter for the vessel. Based on a redelivery notice received, the charter is currently expected to expire on April 9, 2021. As a result, the Partnership has already begun marketing the vessel for long-term employment and intends for the vessel to be utilised in any intervening period in the short-term market, including in the contract of affreightment (‘COA’) market in the North Sea.

Financing and Liquidity

On November 20, 2020, the Partnership entered into an agreement with Shinsei Bank, Limited for an unsecured revolving credit facility of $25 million. The facility matures in November 2023, bears interest at LIBOR plus a margin of 1.75% and has a commitment fee of 0.4% on the undrawn portion of the facility.

On December 30, 2020, the Partnership through its wholly-owned subsidiary, Knutsen Shuttle Tankers 19 AS, which owned the Raquel Knutsen, agreed to enter into a sale and leaseback agreement with a Japanese-based lessor for a lease period of ten years. The closing of the transaction occurred on January 19, 2021. The gross sales price was $94.3 million and a portion of the proceeds was used to repay the outstanding loan and cancelation of the interest rate swap agreements related to the vessel. The bareboat rate under the lease consists of a fixed element per day and there is a fixed-price purchase obligation at maturity. After repayment of the loan and related interest rate swaps, the Partnership realized net proceeds of $38 million after fees and expenses.

As of December 31, 2020, the Partnership had $73.3 million in available liquidity, which consisted of cash and cash equivalents of $52.6 million and $20.7 million of capacity under its existing revolving credit facilities. The revolving credit facilities mature in August 2021 and November 2023. The Partnership’s total interest-bearing debt outstanding as of December 31, 2020 was $1,036.1 million ($1,030.3 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the fourth quarter of 2020 was approximately 2.04% over LIBOR.

As of December 31, 2020, the Partnership had entered into various interest rate swap agreements for a total notional amount of $516.2 million to hedge against the interest rate risks of its variable rate borrowings. As of December 31, 2020, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.88% under its interest rate swap agreements, which have an average maturity of approximately 4.3 years. The Partnership does not apply hedge accounting for derivative instruments, and its financial results are impacted by changes in the market value of such financial instruments.

As of December 31, 2020, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $467.3 million based on total interest-bearing debt outstanding of $1,036.1 million, less interest rate swaps of $516.2 million and less cash and cash equivalents of $52.6 million. The Partnership’s outstanding interest-bearing debt of $1,036.1 million as of December 31, 2020 is repayable as follows:

Acquisition of Tove Knutsen

On December 31, 2020, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT Shuttle Tankers 34 AS (“KNOT 34”), the company that owns the shuttle tanker, Tove Knutsen , from Knutsen NYK (the “Tove Acquisition”). The purchase price was $117.8 million, less approximately $93.1 million of outstanding indebtedness related to the Tove Knutsen plus approximately $0.8 million for certain capitalized fees related to the financing of the vessel and minus other purchase price adjustments of $3.6 million. On the closing of the Tove Acquisition, KNOT 34 repaid $6.9 million of the indebtedness, leaving an aggregate of approximately $86.3 million of debt outstanding under the secured credit facility related to the vessel (the “Tove Facility”). The Tove Facility is repayable in quarterly instalments with a final balloon payment of $65.5 million due at maturity in September 2025. The Tove Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.75%. The purchase price was settled in cash.

The Tove Knutsen is operating in Brazil under a time charter with Equinor, which will expire in the fourth quarter of 2027. The charterer has options to further extend the charter for up to two two-year periods and nine one-year periods. The Partnership’s board of directors (the “Board”) and the conflicts committee of the Board (the “Conflicts Committee”) approved the purchase price of the Tove Acquisition. The Conflicts Committee retained an outside financial advisor to assist with its evaluation of the acquisition and the purchase price offered by Knutsen NYK.

Distributions

On February 11, 2021, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended December 31, 2020 to all common unitholders of record on January 29, 2021. On February 11, 2021, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended December 31, 2020 in an aggregate amount equal to $1.8 million.

Outlook

The Partnership’s earnings for the first quarter of 2021 will be affected by the planned 10-year special survey dry docking of the Bodil Knutsen, which went off-hire February 22, 2021 and which is expected to last approximately 30-32 days. The Tordis Knutsen is due for her first planned 5-year special survey drydocking in the fourth quarter of 2021, which is expected to be carried out in Europe. The vessel is expected to be off-hire for approximately 50-55 days, including mobilization to and from Europe.

The Partnership currently expects that the Windsor Knutsen will be successfully repaired and, given expected insurance recoveries, that no material or lasting financial or operational impact will result. Following the repair, it is expected that a new one-year fixed charter with additional charterer’s options will commence in the third quarter of 2021. From the time of the redelivery of the Bodil Knutsen on or around April 9, 2021, any significant period of reduced utilization thereafter will affect the Partnership’s earnings in 2021. However the Partnership is optimistic of securing new employment for the vessel, has already begun marketing the vessel for long-term employment and intends for the vessel to be utilised in any intervening period in the short-term market, including in the contract of affreightment (‘COA’) market in the North Sea. Based on this outlook and together with the contribution expected from its newest vessel, the Tove Knutsen, the Partnership does not currently expect that the employment of the Bodil Knutsen will have a material adverse effect on the Partnership’s overall financial health in 2021.

As of December 31, 2020, the Partnership’s fleet of seventeen vessels had charters with an average remaining fixed duration of 2.9 years. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 3.1 years on average. As of December 31, 2020, the Partnership had $738 million of remaining contracted forward revenue, excluding options.

In October 2020, Knutsen NYK took delivery of Tove Knutsen’s sister vessel, Synnøve Knutsen, which currently is operating under a short-term contract with Petrobras in Brazil. The vessel is expected to commence on a 5-year time charter contract with Equinor in December 2021.

Questions should be directed to:
Gary Chapman (+44 7496 170 620)