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KNOT Offshore Partners LP(KNOP) - 2023 Q4 - Annual Report
KNOPKNOT Offshore Partners LP(KNOP)2024-04-11 20:16
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Financial Performance and Distribution - The company reduced its quarterly common unit distribution to 0.026perunitstartingfromthefourthquarterof2022,whichmayimpactitsabilitytoraisecapital[34].−Thecompany’scashdistributionpolicymaylimititsgrowthpotentialasitprioritizesdistributionsonSeriesAPreferredUnitsoverreinvestmentintooperations[35].−Thecompanymustmakesubstantialcapitalexpenditurestomaintainitsfleet,whichreducescashavailablefordistribution[37].−Thecompany’sabilitytogeneratecashfromoperationsisinfluencedbyvariousfactors,includingcharterrates,fleetutilization,andoperatingcosts[33].−Thecompany’sfinancingagreementsimposerestrictionsthatmaylimititsabilitytopaydistributions,includingfailuretomeetfinancialcovenantsandotheroperationalconditions[51].−DistributionpaymentsoncommonunitsareprohibiteduntilallaccruedandunpaiddistributionsonSeriesAPreferredUnitsarepaid[150].−Thecompanycanborrowmoneytopaydistributions,whichmayreduceavailablecreditforbusinessoperations[162].−UnitholdersmayhaveliabilitytorepaydistributionsiftheyarefoundtobeimpermissibleundertheMarshallIslandsLimitedPartnershipAct[166].OperationalChallenges−In2023,thecompanyexperiencedapproximately192off−hiredaysduetothescheduleddrydockingoffivevessels,whichcouldadverselyaffectcashavailablefordistribution[40].−Thecompanymayexperienceoperationalproblemswithvesselsthatcouldreducerevenueandincreasecosts,impactingoverallfinancialresults[29].−Thecompanyfacesrisksrelatedtomacroeconomicconditions,includinginflation,interestrates,andsupplychainconstraints,whichmayimpactitsfinancialperformance[29].−Throughout2023,thecompanyexperiencedsignificantincreasesincostsduetoinflation,supplychaindisruptions,andlaborshortages,whichmaycontinuetoaffectoperationsin2024[72].−Supplychaindisruptionsandshortagesofessentialmaterialsmayadverselyimpactthecompany′soperationsandabilitytomeetcustomerdemands[71].−Thepartnership′soperationsaresubjecttorisksfromoutbreaksofinfectiousdiseases,whichcoulddisruptsupplychainsandoperationalcapabilities[117].−Increasedoperationalcostsmayarisefromcompliancewithenhancedsafetyandsecurityrequirementsduetoheightenedenvironmentalandsecurityconcerns[110].CustomerDependencyandRevenueGeneration−Thecompanyisdependentonchartersforrevenuegeneration,withseveralvessels,includingHildaKnutsenandTorillKnutsen,havingchartersexpiringin2024withnofirmcontractsbeyondthattime[41].−FortheyearendedDecember31,2023,keycustomersaccountedforsignificantportionsofrevenue:KnutsenShuttleTankersPoolAS(100.026 per unit starting from the fourth quarter of 2022, which may impact its ability to raise capital[34]. - The company’s cash distribution policy may limit its growth potential as it prioritizes distributions on Series A Preferred Units over reinvestment into operations[35]. - The company must make substantial capital expenditures to maintain its fleet, which reduces cash available for distribution[37]. - The company’s ability to generate cash from operations is influenced by various factors, including charter rates, fleet utilization, and operating costs[33]. - The company’s financing agreements impose restrictions that may limit its ability to pay distributions, including failure to meet financial covenants and other operational conditions[51]. - Distribution payments on common units are prohibited until all accrued and unpaid distributions on Series A Preferred Units are paid[150]. - The company can borrow money to pay distributions, which may reduce available credit for business operations[162]. - Unitholders may have liability to repay distributions if they are found to be impermissible under the Marshall Islands Limited Partnership Act[166]. Operational Challenges - In 2023, the company experienced approximately 192 off-hire days due to the scheduled drydocking of five vessels, which could adversely affect cash available for distribution[40]. - The company may experience operational problems with vessels that could reduce revenue and increase costs, impacting overall financial results[29]. - The company faces risks related to macroeconomic conditions, including inflation, interest rates, and supply chain constraints, which may impact its financial performance[29]. - Throughout 2023, the company experienced significant increases in costs due to inflation, supply chain disruptions, and labor shortages, which may continue to affect operations in 2024[72]. - Supply chain disruptions and shortages of essential materials may adversely impact the company's operations and ability to meet customer demands[71]. - The partnership's operations are subject to risks from outbreaks of infectious diseases, which could disrupt supply chains and operational capabilities[117]. - Increased operational costs may arise from compliance with enhanced safety and security requirements due to heightened environmental and security concerns[110]. Customer Dependency and Revenue Generation - The company is dependent on charters for revenue generation, with several vessels, including Hilda Knutsen and Torill Knutsen, having charters expiring in 2024 with no firm contracts beyond that time[41]. - For the year ended December 31, 2023, key customers accounted for significant portions of revenue: Knutsen Shuttle Tankers Pool AS (10%), Brazil Shipping I Limited (12%), Equinor ASA (13%), Repsol Sinopec Brasil B.V. (13%), Total Energies (14%), and Fronape International Company (18%)[59]. - The company derives all of its time charter and bareboat revenues from eleven customers, indicating a high dependency on a limited customer base[59]. - If the company loses a key customer, it may struggle to obtain replacement long-term charters, exposing it to a volatile spot market[60]. Debt and Financing - As of December 31, 2023, the company had consolidated debt of approximately 963.0 million, with all revolving credit facilities fully drawn[43]. - The company entered into a new 60millionseniorsecuredtermloanonApril5,2024,toreplacea60 million senior secured term loan on April 5, 2024, to replace a 100 million facility, subject to definitive documentation and closing conditions[43]. - The company’s ability to service or refinance its debt is contingent on its financial and operating performance, which may be affected by economic conditions[44]. - Approximately $63.4 million of the partnership's debt is due to be repaid or refinanced during 2024, with potential challenges in refinancing on satisfactory terms[121]. Market and Competitive Environment - The company faces substantial competition for long-term, fixed-rate charters, which may impact its ability to expand relationships with existing customers and obtain new ones[80]. - An increase in global shuttle tanker capacity without a corresponding increase in demand may adversely affect hire rates and vessel values, impacting financial performance[81]. - The company’s growth depends on the demand for shuttle tanker transportation services, which may be affected by persistent low oil prices[29]. - The company’s growth is contingent on the demand for shuttle tanker transportation services, which is influenced by external factors beyond its control[66]. Regulatory and Compliance Issues - Compliance with safety and vessel requirements may incur significant costs, affecting revenue and cash available for distribution[83]. - Compliance with new climate regulations may increase operational costs and require installation of new emission controls, impacting revenue generation[89]. - The SEC has proposed rules requiring public companies to disclose material climate-related risks and GHG emissions, which may lead to increased compliance costs[92]. - The partnership agreement designates the Court of Chancery of the State of Delaware as the exclusive forum for certain disputes, potentially limiting unitholders' options[174]. - Tax obligations in various jurisdictions may reduce cash available for distribution to unitholders, with potential challenges from tax authorities[177]. Environmental, Social, and Governance (ESG) Factors - Increased scrutiny on ESG practices may hinder access to capital, as investors focus on companies' environmental and social governance[91]. - The Initial IMO GHG Strategy aims for a 40% reduction in carbon intensity for international shipping by 2030, compared to 2008 levels[88]. - The 2023 IMO GHG Strategy sets a goal of achieving net-zero GHG emissions from international shipping by around 2050, with interim targets of a 20% reduction by 2030 and 70% by 2040[88]. - Long-term climate change mitigation efforts may reduce demand for oil, adversely affecting shuttle tanker services[90]. - The partnership's operations are significantly impacted by extensive and changing environmental regulations, including the IMO 2020 sulfur content requirement, which reduced the maximum sulfur content in marine fuels from 3.5% to 0.5%[109]. Management and Governance - KNOT owns 28.4% of the common units and all Class B Units, which may lead to conflicts of interest affecting unitholder interests[134]. - The partnership agreement limits unitholders' voting rights, allowing common unitholders to elect only four of the seven board members[132]. - The general partner has significant influence over board decisions, which may not align with the interests of common unitholders[136]. - The partnership agreement discourages removal of the current management without KNOT's consent, which could impact unitholder influence[143]. Fleet and Operations - As of April 11, 2024, the company had a fleet of eighteen shuttle tankers[196]. - The average remaining term of the charters for the vessels in the fleet is 2.0 years, with options to extend by an additional 2.1 years on average[201]. - The company aims to generate stable cash flows and provide sustainable quarterly distributions to unitholders through strategic acquisitions and long-term charters[204]. - The company was formed to operate shuttle tankers under long-term charters, defined as five years or more[187]. - The company has a strategy to expand operations in high-growth regions such as the North Sea and Brazil[204].