November 24, 2020

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KNOT Offshore Partners LP Earnings Release—Interim Results for the Period Ended September 30, 2020

ABERDEEN, Scotland--(BUSINESS WIRE)-- Highlights For the three months ended September 30, 2020, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”): Generated total revenues of $71.3 million, operating income of $30.9 million and net income of $25.1 million. Generated Adjusted EBITDA of $53.3 million (1) Generated distributable cash flow of $28.9 million (1) Reported a distribution coverage ratio of 1.60 (2) Fleet operated with 100% utilization for scheduled operations. The Partnership’s operations have not been materially affected by the COVID-19 outbreak to date. Other events: On October 26, 2020, the charterer of the Windsor Knutsen, a subsidiary of Royal Dutch Shell (“Shell”), sent its notice of redelivery, which will result in the expiration of the charter on November 25, 2020. The Partnership is currently discussing new re-chartering opportunities for commencement in 2021. The Partnership is also seeking one or more short-term charters for the vessel in any intervening period. On this basis, and given available liquidity, the Partnership does not currently anticipate this expiration to have a material adverse effect on its financial position in 2020 or 2021. On November 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended September 30, 2020 to all common unitholders of record on October 30, 2020. On November 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended September 30, 2020 in an aggregate amount equal to $1.8 million. Financial Results Overview Total revenues were $71.3 million for the three months ended September 30, 2020 (the “third quarter”) compared to $70.3 million for the three months ended June 30, 2020 (the “second quarter”). The increase was mainly related to one extra operational day during the third quarter compared to the second quarter and 100% utilization in the third quarter compared to 99.7% utilization in second quarter. Vessel operating expenses for the third quarter of 2020 were $16.7 million, an increase of $3.6 million from $13.1 million in the second quarter of 2020. The increase is mainly due to higher crew expenses for the fleet in the third quarter related to crew changes and increased travel costs due to the COVID-19 pandemic and a claim of $0.6 million related to offhire for the Tordis Knutsen in the second quarter of 2019, which was claimed by the charterer this quarter. General and administrative expenses were $1.3 million for the third quarter, which is unchanged from the second quarter. Depreciation was $22.5 million for the third quarter, which is unchanged from the second quarter. As a result, operating income for the third quarter was $30.9 million compared to $33.4 million in the second quarter. Interest expense for the third quarter was $6.6 million, a decrease of $1.9 million from $8.5 million for the second quarter. The decrease was mainly due to lower LIBOR on average for all credit facilities. Realized and unrealized gain on derivative instruments was $0.9 million in the third quarter, compared to a loss of $3.1 million in the second quarter. The unrealized non-cash element of the mark-to-market gain was $2.4 million for the third quarter of 2020 compared to a loss of $2.8 million for the second quarter of 2020. All of the unrealized gain for the third quarter of 2020 is related to a mark-to-market gain on interest rate swaps. (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. As a result, net income for the third quarter of 2020 was $25.1 million compared to $21.7 million for the second quarter of 2020. Net income for the third quarter of 2020 increased by $11.0 million to $25.1 million from net income of $14.1 million for the three months ended September 30, 2019. Operating income for the third quarter of 2020 decreased by $1.5 million to $30.9 million compared to operating income of $32.4 million in the third quarter of 2019, mainly due to higher operating cost on average for the fleet and the offhire-claim related to the Tordis Knutsen. Total finance expense for the third quarter of 2020 decreased by $12.5 million to $5.8 million compared to finance expense of $18.3 million for the third quarter of 2019. The decrease was mainly due to lower unrealized losses on derivative instruments and lower average interest costs due to a decrease in the US LIBOR rate. Distributable cash flow was $28.9 million for the third quarter of 2020 compared to $30.7 million for the second quarter of 2020. The decrease in distributable cash flow is mainly due to higher crew expenses for the fleet in the third quarter related to crew changes and increased travel costs due to the COVID-19 pandemic and the offhire claim related to the Tordis Knutsen. This was partially offset by one extra operational day in the third quarter and lower interest expense on average due to a decrease in the US LIBOR rate during the third quarter. The distribution declared for the third 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 the Partnership’s operations have not been materially affected by the COVID-19 outbreak to date, the ultimate length and severity of the COVID-19 outbreak 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 a vaccine could mitigate some of these uncertainties going into 2021, but it remains too early to judge the effect of this development. 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 are taking precautions with respect to social distancing, personal hygiene and other measures and 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 vessels as a result of COVID-19 and none of its vessels are planned to drydock for the remainder of 2020. Due to international travel restrictions, there have been 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 costs to date remain within budget. The closure of, or restricted access to, ports and terminals in regions affected by the virus may lead to further operational impacts that 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 fulfill 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 has placed downward pressure on economic activity and energy demand during 2020, and there remains significant uncertainty regarding near-term future oil demand and, therefore, shipping requirements. The fall in oil prices since the end of 2019 has caused many oil exploration and production companies, including certain of our customers, to cut their production forecasts for 2020 and beyond and / or reduce or delay planned future capital expenditures, particularly on new projects. This has had a small 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 two years. 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 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 and bank credit markets, affecting access, timing and cost of capital. 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 is a less viable and more expensive option for accessing liquidity. The Partnership does not have long term debt maturing before August 2021. In the unlikely event that the Partnership is unable to obtain refinancing for this debt or other debt in the future, it 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 third quarter of 2020 with 100% utilization for scheduled operations. All charter payments in respect of the quarter were received in accordance with the Partnership’s charter contracts. The charterer of the Windsor Knutsen, a subsidiary of Shell, sent its notice of redelivery, which will result in the expiration of the charter on November 25, 2020. The Partnership is currently discussing new re-chartering opportunities for commencement in 2021. The Partnership is also seeking one or more short-term charters for the vessel in any intervening period. On this basis, and given available liquidity, the Partnership does not currently anticipate this expiration to have a material adverse effect on its financial position in 2020 or 2021. Financing and Liquidity As of September 30, 2020, the Partnership had $79.0 million in available liquidity, which consisted of cash and cash equivalents of $50.3 million and $28.7 million of capacity under its existing revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023. The Partnership’s total interest-bearing debt outstanding as of September 30, 2020 was $941.5 million ($935.9 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the third quarter of 2020 was approximately 2.1% over LIBOR. As of September 30, 2020, the Partnership had entered into various interest rate swap agreements for a total notional amount of $499.0 million to hedge against the interest rate risks of its variable rate borrowings. As of September 30, 2020, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.82% 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 September 30, 2020, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $392.2 million based on total interest-bearing debt outstanding of $941.5 million, less interest rate swaps of $499.0 million and less cash and cash equivalents of $50.3 million. The Partnership’s outstanding interest-bearing debt of $941.5 million as of September 30, 2020 is repayable as follows: (U.S. Dollars in thousands) Period Repayment Balloon repayment Total Remaining 2020 $ 24,586 — 24,586 2021 86,546 95,811 182,357 2022 71,210 236,509 307,719 2023 55,535 202,185 257,720 2024 13,873 123,393 137,266 2025 and thereafter 1,307 30,500 31,807 Total $ 253,057 $ 688,398 $ 941,455 Distributions On November 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended September 30, 2020 to all common unitholders of record on October 30, 2020. On November 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended September 30, 2020 in an aggregate amount equal to $1.8 million. Outlook There are no dry dockings scheduled for any of the Partnership’s vessels during the fourth quarter of 2020, but the Partnership expects that its earnings for the fourth quarter of 2020 will be affected by reduced utilization of the Windsor Knutsen. Although the effect on earnings cannot yet be quantified with certainty, due to the limited time remaining in 2020 after the vessel is redelivered, the Partnership does not anticipate that there will be a material effect on its overall results in the fourth quarter or in the full year results for 2020. 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 will commence in mid-February and is expected to last approximately 30-32 days. During the dry-docking of the Bodil Knutsen a water treatment system will be installed to comply with IMO ballast water treatment regulations. Any continuation of reduced utilization of the Windsor Knutsen may also affect the Partnership’s earnings in 2021, however the Partnership is in active discussion with potential charterers to secure either short-term interim charters for the vessel or long-term employment. No vessel in the Partnership’s fleet currently accounts for more than 10% of total EBITDA and, with available liquidity, the Partnership does not anticipate today that the current outlook in respect of the Windsor Knutsen will have a material adverse effect on the Partnership’s overall financial health in 2020 or 2021. As of September 30, 2020, the Partnership’s fleet of sixteen vessels had charters with an average remaining fixed duration of 2.2 years. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 3.9 years on average. As of September 30, 2020, the Partnership had $585 million of remaining contracted forward revenue, excluding options. In September 2020, Knutsen NYK Offshore Tankers AS (“Knutsen NYK”) took delivery of the first of two newbuildings that will be chartered to Equinor. The first vessel, Tove Knutsen, is estimated to arrive in Brazil in late November and will commence on a 7-year time charter contract. Equinor has the option to extend the Tove Knutsen charter for up to 20 years. Tove Knutsen’s sister vessel, Synnøve Knutsen, was delivered to Knutsen NYK from the yard in October 2020 and is currently on its positioning voyage for operation in Brazil. It is estimated to arrive in Brazil in December 2020. Knutsen NYK has five additional newbuildings under construction, all of which are under contract for long-term charter. Pursuant to the omnibus agreement the Partnership entered into with Knutsen NYK at the time of its initial public offering, the Partnership has the option to acquire from Knutsen NYK any offshore shuttle tankers that Knutsen NYK acquires or owns that are employed under charters for periods of five or more years. There can be no assurance that the Partnership will acquire any additional vessels from Knutsen NYK. The Board believes that demand for existing and for newbuild shuttle tankers will continue to be driven over the long term based on the requirement to replace older tonnage in the North Sea and Brazil and from further expansion of deep and ultra-deep water offshore oil production in areas such as Pre-salt Brazil and the Barents Sea. Following announcements made in 2020 by many of the large oil exploration and production companies with respect to near-term capital expenditure cuts, the Board expects that these decisions will cause some new developments in Brazil and the North Sea to be delayed by 12 – 24 months. Because of the relatively low costs of production in these areas, it is not expected that these projects will be cancelled and this assertion is supported by the announcements made by many of the license holders and operators of the fields in question. As a result, the Board remains positive with respect to the mid to long term outlook for the growth in demand for shuttle tankers and the opportunities that this will present for the Partnership, while at the same time acknowledging some continuing near-term uncertainty, which may continue through 2021. However the Board is confident today that the Partnership is sufficiently experienced and well-placed to navigate through these headwinds. 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 7.2 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, November 19, 2020 at 11 AM (Eastern Time) to discuss the results for the third quarter of 2020, 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 from the US, dialing 1-855-669-9657 from Canada or 1-412-542-4105 if outside North America (please ask to be joined into the KNOT Offshore Partners LP call). By accessing the webcast, which will be available for the next seven days on the Partnership’s website: www.knotoffshorepartners.com. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended (U.S. Dollars in thousands) September 30, 2020 June 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Time charter and bareboat revenues $ 71,241 $ 70,250 $ 70,983 $ 208,717 $ 212,439 Other income (1) 39 9 26 646 41 Total revenues 71,280 70,259 71,009 209,363 212,480 Vessel operating expenses 16,694 13,112 14,971 45,440 44,728 Depreciation 22,453 22,451 22,430 67,277 67,290 General and administrative expenses 1,258 1,337 1,190 3,982 3,752 Total operating expenses 40,405 36,900 38,591 116,699 115,770 Operating income 30,875 33,359 32,418 92,664 96,710 Finance income (expense): Interest income — 3 225 121 696 Interest expense (6,558) (8,512) (12,459) (25,532) (39,302) Other finance expense (195) (199) (258) (502) (662) Realized and unrealized gain (loss) on derivative instruments (2) 858 (3,092) (5,749) (25,924) (21,996) Net gain (loss) on foreign currency transactions 97 127 (29) (200) (247) Total finance expense (5,798) (11,673) (18,270) (52,037) (61,511) Income (loss) before income taxes 25,077 21,686 14,148 40,627 35,199 Income tax benefit (expense) (1) (3) — (7) (6) Net income (loss) 25,076 21,683 14,148 40,620 35,193 Weighted average units outstanding (in thousands of units): Common units 32,694 32,694 32,694 32,694 32,694 General Partner units 615 615 615 615 615 (1) Other income for the nine months ended September 30, 2020 is mainly related to cargo carried from Brazil to Europe on the drydocking voyage for the Raquel Knutsen scheduled drydocking. As a result, the Partnership received $0.6 million for this extra voyage and the additional revenue has been classified as other income. (2) 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 Nine Months Ended (U.S. Dollars in thousands) September 30, 2020 June 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Realized gain (loss): Interest rate swap contracts $ (1,521) $ (191) $ 969 $ (1,509) $ 3,215 Foreign exchange forward contracts — (109) (206) (109) (1,652) Total realized gain (loss): (1,521) (300) 763 (1,618) 1,563 Unrealized gain (loss): Interest rate swap contracts 2,379 (3,457) (5,560) (24,059) (24,178) Foreign exchange forward contracts — 665 (952) (247) 619 Total unrealized gain (loss): 2,379 (2,792) (6,512) (24,306) (23,559) Total realized and unrealized gain (loss) on derivative instruments: $ 858 $ (3,092) $ (5,749) $ (25,924) $ (21,996) UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (U.S. Dollars in thousands) At September 30, 2020 At December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 50,293 $ 43,525 Amounts due from related parties 1,938 2,687 Inventories 2,066 2,292 Derivative assets — 920 Other current assets 4,457 3,386 Total current assets 58,754 52,810 Long-term assets: Vessels, net of accumulated depreciation 1,613,264 1,677,488 Right-of-use assets 1,373 1,799 Intangible assets, net 832 1,286 Derivative assets — 648 Accrued income 3,146 3,976 Total Long-term assets 1,618,615 1,685,197 Total assets $ 1,677,369 $ 1,738,007 LIABILITIES AND EQUITY Current liabilities: Trade accounts payable $ 3,004 $ 2,730 Accrued expenses 4,181 6,617 Current portion of long-term debt 108,557 83,453 Current lease liabilities 592 572 Current portion of derivative liabilities 7,451 910 Income taxes payable 9 98 Current portion of contract liabilities 1,518 1,518 Prepaid charter 5,264 6,892 Amount due to related parties 1,673 1,212 Total current liabilities 132,249 104,002 Long-term liabilities: Long-term debt 827,353 911,943 Lease liabilities 780 1,227 Derivative liabilities 21,328 5,133 Contract liabilities 2,548 3,685 Deferred tax liabilities 333 357 Total long-term liabilities 852,342 922,345 Total liabilities 984,591 1,026,347 Commitments and contingencies Series A Convertible Preferred Units 89,264 89,264 Equity: Partners’ capital: Common unitholders 592,708 611,241 General partner interest 10,806 11,155 Total partners’ capital 603,514 622,396 Total liabilities and equity $ 1,677,369 $ 1,738,007 Contacts Questions should be directed to: Gary Chapman (+44 7496 170 620) Read full story here

ABERDEEN, Scotland–(BUSINESS WIRE)–

Highlights

For the three months ended September 30, 2020, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

  • Generated total revenues of $71.3 million, operating income of $30.9 million and net income of $25.1 million.
  • Generated Adjusted EBITDA of $53.3 million (1)
  • Generated distributable cash flow of $28.9 million (1)
  • Reported a distribution coverage ratio of 1.60 (2)
  • Fleet operated with 100% utilization for scheduled operations.
  • The Partnership’s operations have not been materially affected by the COVID-19 outbreak to date.

Other events:

  • On October 26, 2020, the charterer of the Windsor Knutsen, a subsidiary of Royal Dutch Shell (“Shell”), sent its notice of redelivery, which will result in the expiration of the charter on November 25, 2020. The Partnership is currently discussing new re-chartering opportunities for commencement in 2021. The Partnership is also seeking one or more short-term charters for the vessel in any intervening period. On this basis, and given available liquidity, the Partnership does not currently anticipate this expiration to have a material adverse effect on its financial position in 2020 or 2021.
  • On November 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended September 30, 2020 to all common unitholders of record on October 30, 2020. On November 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended September 30, 2020 in an aggregate amount equal to $1.8 million.

Financial Results Overview

Total revenues were $71.3 million for the three months ended September 30, 2020 (the “third quarter”) compared to $70.3 million for the three months ended June 30, 2020 (the “second quarter”). The increase was mainly related to one extra operational day during the third quarter compared to the second quarter and 100% utilization in the third quarter compared to 99.7% utilization in second quarter.

Vessel operating expenses for the third quarter of 2020 were $16.7 million, an increase of $3.6 million from $13.1 million in the second quarter of 2020. The increase is mainly due to higher crew expenses for the fleet in the third quarter related to crew changes and increased travel costs due to the COVID-19 pandemic and a claim of $0.6 million related to offhire for the Tordis Knutsen in the second quarter of 2019, which was claimed by the charterer this quarter.

General and administrative expenses were $1.3 million for the third quarter, which is unchanged from the second quarter.

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

As a result, operating income for the third quarter was $30.9 million compared to $33.4 million in the second quarter.

Interest expense for the third quarter was $6.6 million, a decrease of $1.9 million from $8.5 million for the second quarter. The decrease was mainly due to lower LIBOR on average for all credit facilities.

Realized and unrealized gain on derivative instruments was $0.9 million in the third quarter, compared to a loss of $3.1 million in the second quarter. The unrealized non-cash element of the mark-to-market gain was $2.4 million for the third quarter of 2020 compared to a loss of $2.8 million for the second quarter of 2020. All of the unrealized gain for the third quarter of 2020 is related to a mark-to-market gain on interest rate swaps.

(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.

As a result, net income for the third quarter of 2020 was $25.1 million compared to $21.7 million for the second quarter of 2020.

Net income for the third quarter of 2020 increased by $11.0 million to $25.1 million from net income of $14.1 million for the three months ended September 30, 2019. Operating income for the third quarter of 2020 decreased by $1.5 million to $30.9 million compared to operating income of $32.4 million in the third quarter of 2019, mainly due to higher operating cost on average for the fleet and the offhire-claim related to the Tordis Knutsen. Total finance expense for the third quarter of 2020 decreased by $12.5 million to $5.8 million compared to finance expense of $18.3 million for the third quarter of 2019. The decrease was mainly due to lower unrealized losses on derivative instruments and lower average interest costs due to a decrease in the US LIBOR rate.

Distributable cash flow was $28.9 million for the third quarter of 2020 compared to $30.7 million for the second quarter of 2020. The decrease in distributable cash flow is mainly due to higher crew expenses for the fleet in the third quarter related to crew changes and increased travel costs due to the COVID-19 pandemic and the offhire claim related to the Tordis Knutsen. This was partially offset by one extra operational day in the third quarter and lower interest expense on average due to a decrease in the US LIBOR rate during the third quarter. The distribution declared for the third 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 the Partnership’s operations have not been materially affected by the COVID-19 outbreak to date, the ultimate length and severity of the COVID-19 outbreak 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 a vaccine could mitigate some of these uncertainties going into 2021, but it remains too early to judge the effect of this development.

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 are taking precautions with respect to social distancing, personal hygiene and other measures and 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 vessels as a result of COVID-19 and none of its vessels are planned to drydock for the remainder of 2020.

Due to international travel restrictions, there have been 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 costs to date remain within budget. The closure of, or restricted access to, ports and terminals in regions affected by the virus may lead to further operational impacts that 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 fulfill 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 has placed downward pressure on economic activity and energy demand during 2020, and there remains significant uncertainty regarding near-term future oil demand and, therefore, shipping requirements. The fall in oil prices since the end of 2019 has caused many oil exploration and production companies, including certain of our customers, to cut their production forecasts for 2020 and beyond and / or reduce or delay planned future capital expenditures, particularly on new projects. This has had a small 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 two years.

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 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 and bank credit markets, affecting access, timing and cost of capital. 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 is a less viable and more expensive option for accessing liquidity. The Partnership does not have long term debt maturing before August 2021. In the unlikely event that the Partnership is unable to obtain refinancing for this debt or other debt in the future, it 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 third quarter of 2020 with 100% utilization for scheduled operations. All charter payments in respect of the quarter were received in accordance with the Partnership’s charter contracts.

The charterer of the Windsor Knutsen, a subsidiary of Shell, sent its notice of redelivery, which will result in the expiration of the charter on November 25, 2020. The Partnership is currently discussing new re-chartering opportunities for commencement in 2021. The Partnership is also seeking one or more short-term charters for the vessel in any intervening period. On this basis, and given available liquidity, the Partnership does not currently anticipate this expiration to have a material adverse effect on its financial position in 2020 or 2021.

Financing and Liquidity

As of September 30, 2020, the Partnership had $79.0 million in available liquidity, which consisted of cash and cash equivalents of $50.3 million and $28.7 million of capacity under its existing revolving credit facilities. The revolving credit facilities mature in August 2021 and September 2023. The Partnership’s total interest-bearing debt outstanding as of September 30, 2020 was $941.5 million ($935.9 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the third quarter of 2020 was approximately 2.1% over LIBOR.

As of September 30, 2020, the Partnership had entered into various interest rate swap agreements for a total notional amount of $499.0 million to hedge against the interest rate risks of its variable rate borrowings. As of September 30, 2020, the Partnership receives interest based on three or six-month LIBOR and pays a weighted average interest rate of 1.82% 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 September 30, 2020, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $392.2 million based on total interest-bearing debt outstanding of $941.5 million, less interest rate swaps of $499.0 million and less cash and cash equivalents of $50.3 million. The Partnership’s outstanding interest-bearing debt of $941.5 million as of September 30, 2020 is repayable as follows:

(U.S. Dollars in thousands)

Period

Repayment

Balloon

repayment

Total

Remaining 2020

$

24,586

24,586

2021

86,546

95,811

182,357

2022

71,210

236,509

307,719

2023

55,535

202,185

257,720

2024

13,873

123,393

137,266

2025 and thereafter

1,307

30,500

31,807

Total

$

253,057

$

688,398

$

941,455

Distributions

On November 13, 2020, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended September 30, 2020 to all common unitholders of record on October 30, 2020. On November 13, 2020, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended September 30, 2020 in an aggregate amount equal to $1.8 million.

Outlook

There are no dry dockings scheduled for any of the Partnership’s vessels during the fourth quarter of 2020, but the Partnership expects that its earnings for the fourth quarter of 2020 will be affected by reduced utilization of the Windsor Knutsen. Although the effect on earnings cannot yet be quantified with certainty, due to the limited time remaining in 2020 after the vessel is redelivered, the Partnership does not anticipate that there will be a material effect on its overall results in the fourth quarter or in the full year results for 2020.

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 will commence in mid-February and is expected to last approximately 30-32 days. During the dry-docking of the Bodil Knutsen a water treatment system will be installed to comply with IMO ballast water treatment regulations.

Any continuation of reduced utilization of the Windsor Knutsen may also affect the Partnership’s earnings in 2021, however the Partnership is in active discussion with potential charterers to secure either short-term interim charters for the vessel or long-term employment. No vessel in the Partnership’s fleet currently accounts for more than 10% of total EBITDA and, with available liquidity, the Partnership does not anticipate today that the current outlook in respect of the Windsor Knutsen will have a material adverse effect on the Partnership’s overall financial health in 2020 or 2021.

As of September 30, 2020, the Partnership’s fleet of sixteen vessels had charters with an average remaining fixed duration of 2.2 years. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 3.9 years on average. As of September 30, 2020, the Partnership had $585 million of remaining contracted forward revenue, excluding options.

In September 2020, Knutsen NYK Offshore Tankers AS (“Knutsen NYK”) took delivery of the first of two newbuildings that will be chartered to Equinor. The first vessel, Tove Knutsen, is estimated to arrive in Brazil in late November and will commence on a 7-year time charter contract. Equinor has the option to extend the Tove Knutsen charter for up to 20 years.

Tove Knutsen’s sister vessel, Synnøve Knutsen, was delivered to Knutsen NYK from the yard in October 2020 and is currently on its positioning voyage for operation in Brazil. It is estimated to arrive in Brazil in December 2020.

Knutsen NYK has five additional newbuildings under construction, all of which are under contract for long-term charter.

Pursuant to the omnibus agreement the Partnership entered into with Knutsen NYK at the time of its initial public offering, the Partnership has the option to acquire from Knutsen NYK any offshore shuttle tankers that Knutsen NYK acquires or owns that are employed under charters for periods of five or more years.

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

The Board believes that demand for existing and for newbuild shuttle tankers will continue to be driven over the long term based on the requirement to replace older tonnage in the North Sea and Brazil and from further expansion of deep and ultra-deep water offshore oil production in areas such as Pre-salt Brazil and the Barents Sea.

Following announcements made in 2020 by many of the large oil exploration and production companies with respect to near-term capital expenditure cuts, the Board expects that these decisions will cause some new developments in Brazil and the North Sea to be delayed by 12 – 24 months. Because of the relatively low costs of production in these areas, it is not expected that these projects will be cancelled and this assertion is supported by the announcements made by many of the license holders and operators of the fields in question.

As a result, the Board remains positive with respect to the mid to long term outlook for the growth in demand for shuttle tankers and the opportunities that this will present for the Partnership, while at the same time acknowledging some continuing near-term uncertainty, which may continue through 2021. However the Board is confident today that the Partnership is sufficiently experienced and well-placed to navigate through these headwinds.

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 7.2 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, November 19, 2020 at 11 AM (Eastern Time) to discuss the results for the third quarter of 2020, 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 from the US, dialing 1-855-669-9657 from Canada or 1-412-542-4105 if outside North America (please ask to be joined into the KNOT Offshore Partners LP call).
  • By accessing the webcast, which will be available for the next seven days on the Partnership’s website: www.knotoffshorepartners.com.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended

Nine Months Ended

(U.S. Dollars in thousands)

September 30,

2020

June 30,

2020

September 30,

2019

September 30,

2020

September 30,

2019

Time charter and bareboat revenues

$

71,241

$

70,250

$

70,983

$

208,717

$

212,439

Other income (1)

39

9

26

646

41

Total revenues

71,280

70,259

71,009

209,363

212,480

Vessel operating expenses

16,694

13,112

14,971

45,440

44,728

Depreciation

22,453

22,451

22,430

67,277

67,290

General and administrative expenses

1,258

1,337

1,190

3,982

3,752

Total operating expenses

40,405

36,900

38,591

116,699

115,770

Operating income

30,875

33,359

32,418

92,664

96,710

Finance income (expense):

Interest income

3

225

121

696

Interest expense

(6,558)

(8,512)

(12,459)

(25,532)

(39,302)

Other finance expense

(195)

(199)

(258)

(502)

(662)

Realized and unrealized gain (loss) on derivative instruments (2)

858

(3,092)

(5,749)

(25,924)

(21,996)

Net gain (loss) on foreign currency transactions

97

127

(29)

(200)

(247)

Total finance expense

(5,798)

(11,673)

(18,270)

(52,037)

(61,511)

Income (loss) before income taxes

25,077

21,686

14,148

40,627

35,199

Income tax benefit (expense)

(1)

(3)

(7)

(6)

Net income (loss)

25,076

21,683

14,148

40,620

35,193

Weighted average units outstanding (in thousands of units):

Common units

32,694

32,694

32,694

32,694

32,694

General Partner units

615

615

615

615

615

(1)

Other income for the nine months ended September 30, 2020 is mainly related to cargo carried from Brazil to Europe on the drydocking voyage for the Raquel Knutsen scheduled drydocking. As a result, the Partnership received $0.6 million for this extra voyage and the additional revenue has been classified as other income.

(2)

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

Nine Months Ended

(U.S. Dollars in thousands)

September 30,

2020

June 30,

2020

September 30,

2019

September 30,

2020

September 30,

2019

Realized gain (loss):

Interest rate swap contracts

$

(1,521)

$

(191)

$

969

$

(1,509)

$

3,215

Foreign exchange forward contracts

(109)

(206)

(109)

(1,652)

Total realized gain (loss):

(1,521)

(300)

763

(1,618)

1,563

Unrealized gain (loss):

Interest rate swap contracts

2,379

(3,457)

(5,560)

(24,059)

(24,178)

Foreign exchange forward contracts

665

(952)

(247)

619

Total unrealized gain (loss):

2,379

(2,792)

(6,512)

(24,306)

(23,559)

Total realized and unrealized gain (loss) on derivative instruments:

$

858

$

(3,092)

$

(5,749)

$

(25,924)

$

(21,996)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(U.S. Dollars in thousands)

At September 30, 2020

At December 31, 2019

ASSETS

Current assets:

Cash and cash equivalents

$

50,293

$

43,525

Amounts due from related parties

1,938

2,687

Inventories

2,066

2,292

Derivative assets

920

Other current assets

4,457

3,386

Total current assets

58,754

52,810

Long-term assets:

Vessels, net of accumulated depreciation

1,613,264

1,677,488

Right-of-use assets

1,373

1,799

Intangible assets, net

832

1,286

Derivative assets

648

Accrued income

3,146

3,976

Total Long-term assets

1,618,615

1,685,197

Total assets

$

1,677,369

$

1,738,007

LIABILITIES AND EQUITY

Current liabilities:

Trade accounts payable

$

3,004

$

2,730

Accrued expenses

4,181

6,617

Current portion of long-term debt

108,557

83,453

Current lease liabilities

592

572

Current portion of derivative liabilities

7,451

910

Income taxes payable

9

98

Current portion of contract liabilities

1,518

1,518

Prepaid charter

5,264

6,892

Amount due to related parties

1,673

1,212

Total current liabilities

132,249

104,002

Long-term liabilities:

Long-term debt

827,353

911,943

Lease liabilities

780

1,227

Derivative liabilities

21,328

5,133

Contract liabilities

2,548

3,685

Deferred tax liabilities

333

357

Total long-term liabilities

852,342

922,345

Total liabilities

984,591

1,026,347

Commitments and contingencies

Series A Convertible Preferred Units

89,264

89,264

Equity:

Partners’ capital:

Common unitholders

592,708

611,241

General partner interest

10,806

11,155

Total partners’ capital

603,514

622,396

Total liabilities and equity

$

1,677,369

$

1,738,007

Contacts

Questions should be directed to:

Gary Chapman (+44 7496 170 620)

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