KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended December 31, 2018

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ABERDEEN, Scotland–(BUSINESS WIRE)–Highlights

For the three months ended December 31, 2018, KNOT Offshore Partners LP
(“KNOT Offshore Partners” or the “Partnership”):

  • Generated total revenues of $70.9 million, operating income of
    $33.0 million and net income of $8.8 million.
  • Generated quarterly Adjusted EBITDA of $55.4 million.1
  • Generated quarterly distributable cash flow of $27.3 million.1
  • Reported a distribution coverage ratio of 1.51.2
  • Fleet operated with 99.7% utilization for scheduled operations and
    98.3% utilization taking into account the scheduled drydocking of the Ingrid
    Knutsen, which was offhire for 20 days in the fourth quarter of
    2018.

Other events:

  • On November 9, 2018, Equinor ASA (“Equinor”, formerly Statoil ASA)
    exercised its option to extend the time charter of the Bodil Knutsen
    by one additional year until May 2020.
  • On November 29, 2018, the Partnership announced that John Costain has
    decided to resign as Chief Executive Officer and Chief Financial
    Officer of the Partnership as of May 31, 2019 in order to pursue other
    interests. The Partnership’s board of directors (the “Board”) has
    approved the appointment of Gary Chapman as the new Chief Executive
    Officer and Chief Financial Officer of the Partnership commencing June
    1, 2019.
  • On December 17, 2018, the Partnership’s subsidiary that owns the Windsor
    Knutsen and a subsidiary of Royal Dutch Shell (“Shell”) agreed to
    suspend the vessel’s time charter contract for a minimum of 10 months
    and a maximum of 12 months. The suspension period commenced March 4,
    2019. During the suspension period, the Windsor Knutsen will
    operate under a time charter contract with Knutsen Shuttle Tanker Pool
    AS, a wholly owned subsidiary of Knutsen NYK Offshore Tankers AS
    (“Knutsen NYK”), on the same terms as the existing time charter
    contract with Shell.
  • On February 14, 2019, the Partnership paid a cash distribution of
    $0.52 per common unit with respect to the quarter ended December 31,
    2018 to all common unitholders of record on February 1, 2019. On
    February 14, 2019, the Partnership also paid a cash distribution to
    Series A Preferred unitholders with respect to the quarter ended
    December 31, 2018 in an aggregate amount equal to $1.8 million

Financial Results Overview

Total revenues were $70.9 million for the three months ended December
31, 2018 (the “fourth quarter”) compared to $70.7 million for the three
months ended September 30, 2018 (the “third quarter”). The increase in
revenues was mainly due to increased earnings from the Hilda Knutsen, as
the vessel completed its scheduled first special survey drydocking
during the third quarter, and increased earnings from the Torill
Knutsen, as the vessel completed its scheduled first special survey
drydocking in the beginning of the fourth quarter. The increase was
partly offset by reduced revenues from the Ingrid Knutsen due to
the offhire period for the vessel as a result of its scheduled first
special survey drydocking which commenced in the fourth quarter.

Vessel operating expenses for the fourth quarter of 2018 were
$14.2 million, a decrease of $1.1 million from $15.3 million in the
third quarter of 2018. The decrease was mainly due to the scheduled
drydocking of the Hilda Knutsen and the Torill Knutsen
which took place in the third quarter and lower operating costs on
average due to the strengthening of the U.S. Dollar against the
Norwegian Kroner (NOK). The decrease was partially offset by increased
costs for the Ingrid Knutsen, which went offhire in the fourth
quarter due to its scheduled drydocking.

General and administrative expenses were $1.3 million for the fourth
quarter of 2018 compared to $1.3 million in the third quarter of 2018.

_______________
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.

Depreciation was $22.5 million for the fourth quarter of 2018, an
increase of $0.1 million from $22.4 million in the third quarter of
2018. The increase is mainly due to increased depreciation for the Ingrid
Knutsen and the Torill Knutsen due to drydock additions.

As a result, operating income for the fourth quarter of 2018 was
$33.0 million compared to $31.7 million in the third quarter of 2018.

Interest expense for the fourth quarter of 2018 was $13.4 million, a
decrease of $0.1 from $13.5 million for the third quarter of 2018.

Realized and unrealized loss on derivative instruments was $10.9 million
in the fourth quarter of 2018, compared to a gain of $3.0 million in the
third quarter of 2018. The unrealized non-cash element of the
mark-to-market loss was $11.3 million for the fourth quarter of 2018
compared to a gain of $2.1 million for the third quarter of 2018. Of the
unrealized loss for the fourth quarter of 2018, $9.9 million is related
to a mark-to-market loss on interest rate swaps due to a decrease in the
US swap rate and $1.4 million is related to foreign exchange contracts.

As a result, net income for the fourth quarter of 2018 was $8.8 million
compared to $20.9 million for the third quarter of 2018.

Net income for the fourth quarter of 2018 decreased by $9.8 million from
net income of $18.6 million for the three months ended December 31, 2017
to net income of $8.8 million for the three months ended December 31,
2018. The operating income for the fourth quarter of 2018 increased by
$7.9 million compared to the fourth quarter of 2017, mainly due to
increased earnings from the Brasil Knutsen and the Anna Knutsen
being included in the Partnership’s results of operations from
December 15, 2017 and March 1, 2018, respectively. Total finance expense
for the fourth quarter of 2018 increased by $17.7 million compared to
finance expense for the fourth quarter of 2017. The increase was mainly
due to $4.2 million in increased interest expenses due to additional
debt in connection with the acquisitions of the Brasil Knutsen
and the Anna Knutsen and higher LIBOR margin. In addition,
realized and unrealized loss on derivatives instruments increased by
$13.9 million due to a decrease in the US swap rate in the fourth
quarter of 2018.

Distributable cash flow was $27.3 million for the fourth quarter of 2018
compared to $26.3 million for the third quarter of 2018. The increase in
distributable cash flow is mainly due to increased earnings from the Hilda
Knutsen and the Torill Knutsen as a result of off-hire due to
their scheduled drydocking in the third quarter of 2018 and lower
operating expenses on average for the fleet. The increase was partially
offset by reduced earnings from the Ingrid Knutsen as a result of
its scheduled drydocking which started in the third quarter of 2018. The
distribution declared for the fourth quarter of 2018 was $0.52 per
common unit, equivalent to an annualized distribution of $2.08.

Operational review

The Partnership’s vessels operated throughout the fourth quarter of 2018
with 99.7% utilization for scheduled operations and 98.3% utilization
considering the scheduled drydocking of the Ingrid Knutsen.

The Ingrid Knutsen went offhire on November 1, 2018 for the
mobilization trip to a shipyard in Denmark in order to complete her
planned 5-year special survey drydocking. The Ingrid Knutsen went
back on charter on November 22, 2018.

On November 9, 2018, Equinor exercised its option to extend
the time charter of the Bodil Knutsen by one additional year
until May 2020. Following the exercise of the option, Equinor has four
one-year options to extend the time charter.

On December 17, 2018, the Partnership’s subsidiary that owns the Windsor
Knutsen and Shell agreed to suspend the vessel’s time charter
contract for a minimum of 10 months and a maximum of 12 months. The
suspension period commenced March 4, 2019. During the suspension period,
the Windsor Knutsen will operate under a time charter contract
with Knutsen Shuttle Tanker Pool AS, on the same terms as the existing
time charter contract with Shell. The Partnership agreed to the
suspension of the contract with Shell and the substitute time charter in
order to accommodate the mutual needs of Shell and Knutsen Shuttle
Tanker Pool AS.

Financing and Liquidity

As of December 31, 2018, the Partnership had $70.4 million in available
liquidity, which consisted of cash and cash equivalents of $41.7 million
and $28.7 million of capacity under its revolving credit facilities. The
revolving credit facilities mature in August 2019 and September 2023.
The Partnership’s total interest-bearing debt outstanding as of December
31, 2018 was $1,087.3 million ($1,077.3 million net of debt issuance
cost). The average margin paid on the Partnership’s outstanding debt
during the fourth quarter of 2018 was approximately 2.1% over LIBOR.

As of December 31, 2018, the Partnership had entered into foreign
exchange forward contracts, selling a total notional amount of
$30.0 million against the NOK at an average exchange rate of NOK 8.14
per 1.00 U.S. Dollar. These foreign exchange forward contracts are
economic hedges for certain vessel operating expenses and general
expenses in NOK.

As of December 31, 2018, the Partnership had entered into various
interest rate swap agreements for a total notional amount of
$555.5 million to hedge against the interest rate risks of its variable
rate borrowings. As of December 31, 2018, the Partnership receives
interest based on three or six-month LIBOR and pays a weighted average
interest rate of 1.86% under its interest rate swap agreements, which
have an average maturity of approximately 4.9 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, 2018, the Partnership’s net exposure to floating
interest rate fluctuations on its outstanding debt was approximately
$490.1 million based on total interest bearing debt outstanding of
$1,087.3 million, less interest rate swaps of $555.5 million and less
cash and cash equivalents of $41.7 million. The Partnership’s
outstanding interest bearing debt of $1,087.3 million as of December 31,
2018 is repayable as follows:

(U.S. Dollars in thousands) Period repayment Balloon repayment
2019 $ 84,534 $ 25,000
2020 85,945
2021 86,545 70,811
2022 71,210 236,509
2023 and thereafter 70,715 356,078
Total $ 398,949 $ 688,398

Distributions

On November 14, 2018, the Partnership paid a quarterly cash distribution
of $0.52 per common unit with respect to the quarter ended September 30,
2018 to all common unitholders of record as of the close of business on
November 1, 2018. On November 14, 2018, the Partnership also paid a cash
distribution to the Series A Preferred unitholders with respect to the
quarter ended September 30, 2018 in an aggregate amount equal to
$1.8 million.

On February 14, 2019, the Partnership paid a cash distribution of $0.52
per common unit with respect to the quarter ended December 31, 2018 to
all common unitholders of record on February 1, 2019. On February 14,
2019, the Partnership also paid a cash distribution to Series A
Preferred unitholders with respect to the quarter ended December 31,
2018 in an aggregate amount equal to $1.8 million.

Management Change

On June 1, 2019, Gary Chapman will become the Chief Executive Officer
and Chief Financial Officer of the Partnership. Mr. Chapman is a fellow
of the Institute of Chartered Accountants in England and Wales and
currently serves as the Chief Financial Officer of Biggin Hill Airport
Ltd, a private company which owns a business aviation airport in London.
From 2008 to July 2017, Mr. Chapman served as the finance director of
NYK Energy Transport (Atlantic) Limited and from 2003 to 2008 as the
European head of tax for the NYK Group Europe. Prior to 2003, Mr.
Chapman served in various roles for KPMG. Mr. Chapman will continue to
serve as the Chief Financial Officer of Biggin Hill Airport Ltd.
concurrently with his role as Chief Executive Officer and Chief
Financial Officer of the Partnership until December 1, 2019.

Outlook

There are no dry dockings scheduled for any of the Partnership’s fleet
during the 2019 year.

As of December 31, 2018, the Partnership’s fleet of sixteen vessels had
an average remaining fixed contract duration of 3.7 years. In addition,
the charterers of the Partnership’s time charter vessels have options to
extend their charters by an additional 4.4 years on average.

On September 26, 2018, Knutsen NYK, the owner of the Partnership’s
general partner, entered into new long term charters with Equinor for
two Suezmax DP2 shuttle tanker newbuildings to be constructed by Hyundai
Heavy Industries in South Korea with delivery scheduled in the second
half of 2020. Pursuant to the omnibus agreement the Partnership entered
into with Knutsen NYK at the time of its initial public offering, the
Partnership has the option to acquire from Knutsen NYK any offshore
shuttle tankers that Knutsen NYK acquires or owns that are employed
under charters for periods of five or more years.

There can be no assurance that the Partnership will acquire any
additional vessels from Knutsen NYK.

The Board believes that demand for newbuild offshore shuttle tankers
will continue to be driven over time based on the requirement to replace
older tonnage in the North Sea and Brazil and further expansion into
deep water offshore oil production areas such as in Pre-salt Brazil and
the Barents Sea. The Board further believes that significant growth in
demand exists and that this will continue for new shuttle tankers as the
availability of existing vessels has reduced and modern operational
demands have increased. Consequently, there should be opportunities to
further grow the Partnership.

About KNOT Offshore Partners LP

KNOT Offshore Partners owns operates and acquires shuttle tankers under
long-term charters in the offshore oil production regions of the North
Sea and Brazil. KNOT Offshore Partners owns and operates a fleet of
sixteen offshore shuttle tankers with an average age of 5.5 years.

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

The Partnership plans to host a conference call on Thursday, March 14,
2019 at noon (Eastern Time) to discuss the results for the fourth
quarter of 2018, and invites all unitholders and interested parties to
listen to the live conference call by choosing from the following
options:

  • By dialing 1-855-209-8259 or 1-412-542-4105, if outside North America.
  • By accessing the webcast, which will be available for the next seven
    days on the Partnership’s website: www.knotoffshorepartners.com.

March 13, 2019
KNOT Offshore Partners L.P.
Aberdeen, United
Kingdom

Questions should be directed to:
John Costain (+44 7496 170 620)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended Year ended December 31,
(U.S. Dollars in thousands)

December
31, 2018

September
30, 2018

December
31, 2017

2018 2017
Time charter and bareboat revenues (1) (2) $ 70,878 $ 70,706 $ 59,247 $ 278,191 $ 212,501
Loss of hire insurance recoveries 1,750 450 5,176
Other income (3) 53 12 592 815 1,526
Total revenues 70,931 70,718 61,589 279,456 219,203
Vessel operating expenses 14,221 15,289 15,172 56,730 46,709
Depreciation 22,450 22,400 20,079 88,756 71,583
General and administrative expenses 1,289 1,307 1,308 5,290 5,555
Total operating expenses 37,960 38,996 36,559 150,776 123,847
Operating income 32,971 31,722 25,030 128,680 95,356
Finance income (expense):
Interest income 247 196 101 739 248
Interest expense (13,364) (13,472) (9,208) (49,956) (30,714)
Other finance expense (228) (406) (450) (1,260) (1,406)
Realized and unrealized gain (loss) on derivative instruments (4) (10,905) 3,000 3,015 4,039 4,831
Net gain (loss) on foreign currency transactions 91 (100) 128 (79) (267)
Total finance expense (24,159) (10,782) (6,414) (46,517) (27,308)
Income before income taxes 8,812 20,940 18,616 82,163 68,048
Income tax benefit (expense) 18 (9) 24 2 16
Net income 8,830 20,931 18,640 82,165 68,064
Weighted average units outstanding (in thousands of units):
Common units 32,694 32,694 31,422 32,694 30,068
General Partner units 615 615 591 615 567
(1)

In May 2014, the Financial Accounting Standards Board (the “FASB”)
issued accounting standards update (“ASU”) 2014-09
“Revenue
from Contracts With Customers (Topic 606)” and subsequent
amendments. The Partnership adopted the new revenue
standard
on January 1, 2018 and there is no impact on the adoption of this
standard on the Unaudited Consolidated Financial
Statements.

(2)

Time charter revenues for the fourth quarter of 2018, the third
quarter of 2018 and the fourth quarter of 2017 include a non-cash
item
of approximately $0.9 million, $1.1 million and $0.7 million,
respectively, in reversal of contract liability and asset
provision,
income recognition of prepaid charter hire and accrued income for
the Carmen Knutsen and for the Brasil Knutsen
based
on the average charter rate for the fixed period.

(3)

Other income is mainly related to guarantee income from Knutsen
NYK. Pursuant to the omnibus agreement, Knutsen NYK
agreed to
guarantee the payments of the hire rate that is equal to or
greater than the hire rate payable under the initial charters
of
the Bodil Knutsen and the Windsor Knutsen for a
period of five years from the closing date of the Partnership’s
initial public
offering. In October 2015, the Windsor
Knutsen commenced operating under a new Shell time charter.
The hire rate for the new
charter is below the initial
charter hire rate and the difference between the new hire rate and
the initial rate was paid by Knutsen
NYK until April 15, 2018.

(4)

Realized gains (losses) on derivative instruments relate to
amounts the Partnership actually received (paid) to settle
derivative
instruments, and the unrealized gains (losses) on
derivative instruments related to changes in the fair value of
such derivative
instruments, as detailed in the table below:

Three Months Ended Year Ended December 31
(U.S. Dollars in thousands) December 31,
2018
September 30,
2018
December 31,
2017
2018 2017
Realized gain (loss):
Interest rate swap contracts $ 711 $ 716 $ (764) $ 1,180 $ (2,840)
Foreign exchange forward contracts (359) 204 1,084 280
Total realized gain (loss): 352 920 (764) 2,264 (2,560)
Unrealized gain (loss):
Interest rate swap contracts (9,896) 2,384 4,566 4,428 5,514
Foreign exchange forward contracts (1,361) (304) (787) (2,653) 1,877
Total unrealized gain (loss): (11,257) 2,080 3,779 1,775 7,391
Total realized and unrealized gain (loss) on derivative instruments: $ (10,905) $ 3,000 $ 3,015 $ 4,039 $ 4,831

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(U.S. Dollars in thousands) At December 31,
2018

At December 31,
2017

ASSETS
Current assets:
Cash and cash equivalents $ 41,712 $ 46,104
Amounts due from related parties 1,141 571
Inventories 2,443 2,241
Derivative assets 4,621 1,579
Other current assets 2,462 5,610
Total current assets 52,379 56,105
Long-term assets:
Vessels, net of accumulated depreciation 1,767,080 1,723,023
Intangible assets, net 1,891 2,497
Derivative assets 11,667 9,850
Accrued income 3,807 1,693
Total Long-term assets 1,784,445 1,737,063
Total assets $ 1,836,824 $ 1,793,168
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable $ 4,800 $ 5,224
Accrued expenses 6,464 6,504
Current portion of long-term debt 106,926 92,985
Current portion of derivative liabilities 1,740 978
Income taxes payable 130 175
Current portion of contract liabilities 1,518 1,518
Prepaid charter and deferred revenue 5,771 9,980
Amount due to related parties 1,070 5,450
Total current liabilities 128,419 122,814
Long-term liabilities:
Long-term debt 970,365 933,630
Derivative liabilities 345 164
Contract liabilities 5,203 6,722
Deferred tax liabilities 453 624
Total long-term liabilities 976,366 941,140
Total liabilities 1,104,785 1,063,954
Commitments and contingencies
Series A Convertible Preferred Units 89,264 89,264
Equity:
Partners’ capital:
Common unitholders 631,244 628,471
General partner interest 11,531 11,479
Total partners’ capital 642,775 639,950
Total liabilities and equity $ 1,836,824 $ 1,793,168

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
PARTNERS’ CAPITAL

Partners’ Capital

Accumulated
Other
Comprehensive
Income
(Loss)

Total
Partners’
Capital

Series A
Convertible
Preferred
Units

(U.S. Dollars in thousands) Common
Units
Subordinated
Units
General Partner
Units

Consolidated balance at December
31, 2015

$ 411,317 $ 99,158 $ 10,295 $ $ 520,770 $
Net income 54,794 5,052 1,256 61,102
Other comprehensive income
Cash distributions (48,820) (10,088) (1,253) (60,161)

Conversion of subordinated units to

common units

94,123 (94,123)

Consolidated balance at December
31, 2016

$ 511,413 $ $ 10,297 $ $ 521,710 $
Net income 61,651 1,160 62,811 5,253
Other comprehensive income
Cash distributions (64,307) (1,210) (65,517) (3,453)

Net proceeds from issuance of
common units

119,714 1,232 120,946

Net proceeds from sale of Series A
Convertible

Preferred Units

87,464

Consolidated balance at December
31, 2017

$ 628,471 $ $ 11,479 $ $ 639,950 $ 89,264
Net income 73,581 1,384 74,965 7,200
Other comprehensive income
Cash distributions (70,804) (1,332) (72,136) (7,200)

Net proceeds from issuance of
common units

(4) (4)

Consolidated balance at December
31, 2018

$ 631,244 $ $ 11,531 $ $ 642,775 $ 89,264

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31,
(U.S. Dollars in thousands) 2018 2017
OPERATING ACTIVITIES
Net income $ 82,165 $ 68,064
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 88,756 71,583
Amortization of contract intangibles / liabilities (912) (1,089)
Amortization of deferred revenue (1,056) (1,487)
Amortization of deferred debt issuance cost 3,188 1,737
Drydocking expenditure (12,421) (6,885)
Income tax expense (2) (16)
Income taxes paid (190) (219)
Unrealized (gain) loss on derivative instruments (2,076) (7,391)
Unrealized (gain) loss on foreign currency transactions 45 45
Changes in operating assets and liabilities:
Decrease (increase) in amounts due from related parties (49) 62,391
Decrease (increase) in inventories 55 (358)
Decrease (increase) in other current assets 3,256 (1,724)
Decrease (increase) in accrued revenue (2,114) (540)
Increase (decrease) in trade accounts payable (1,297) 2,195
Increase (decrease) in accrued expenses (1,052) 142
Increase (decrease) prepaid revenue (3,154) 1,435
Increase (decrease) in amounts due to related parties (4,496) (33,298)
Net cash provided by operating activities 148,646 154,585
INVESTING ACTIVITIES
Disposals (additions) to vessel and equipment (117) (849)
Acquisition of Anna Knutsen (net of cash acquired) (15,376)
Acquisition of Brasil Knutsen (net of cash acquired) (547)
Acquisition of Lena Knutsen (net of cash acquired) (32,766)
Acquisition of Vigdis Knutsen (net of cash acquired) (28,321)
Acquisition of Tordis Knutsen (net of cash acquired) (32,374)
Net cash (used in) investing activities (15,493) (94,857)
FINANCING ACTIVITIES
Proceeds from long-term debt 497,779 211,500
Repayment of long-term debt (527,979) (297,708)
Repayment of long-term debt from related parties (22,535) (93,369)
Payment of debt issuance cost (5,301) (1,241)
Cash distribution (79,336) (68,970)
Net proceeds from issuance of common units (4) 120,946
Net proceeds from sale of Convertible Preferred Units 87,464
Net cash (used in) financing activities (137,376) (41,378)
Effect of exchange rate changes on cash (169) 90
Net increase in cash and cash equivalents (4,392) 18,440
Cash and cash equivalents at the beginning of the period 46,104 27,664
Cash and cash equivalents at the end of the period $ 41,712 $ 46,104

Contacts

KNOT Offshore Partners
John Costain (+44 7496 170 620)

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