KNOT Offshore Partners LP Earnings Release - Interim Results for the Period Ended June 30, 2013

  KNOT Offshore Partners LP Earnings Release - Interim Results for the Period
  Ended June 30, 2013

Business Wire

ABERDEEN, Scotland -- August 26, 2013

Highlights

  *KNOT Offshore Partners LP (NYSE:KNOP) ("KNOT Offshore Partners" or the
    "Partnership") completed its initial public offering (“IPO”) and its
    common units began trading on the New York Stock Exchange in April 2013.
  *Generated net income of $4.0 million and operating income of $7.4 million
    for the second quarter of 2013.
  *Generated Adjusted EBITDA of $12.7 million for the second quarter 2013.^1
  *Generated distributable cash flow of $7.2 million for the second quarter
    of 2013.^2
  *Declared distribution of $0.3173 per unit with respect to the period ended
    June 30, 2013 (representing a prorated distribution for the period from
    closing date of the IPO on April 15, 2013 through June 30, 2013). This
    corresponds to a quarterly distribution of $0.3750 per unit (or $1.50 per
    unit on an annual basis), which is consistent with the forecasted
    distribution set forth in the IPO prospectus.
  *On June 25, 2013, KNOT Offshore Partners held its first annual meeting of
    unitholders at which four members were elected to its board of directors
    (the “Board”).

Subsequent Event

  *On August 1, 2013, KNOT Offshore Partners completed the acquisition of the
    company that owns and operates the offshore shuttle tanker “Carmen
    Knutsen” from Knutsen NYK Offshore Tankers AS (“KNOT”) for $145.0 million.

Financial Results Overview

KNOT Offshore Partners reports net income of $4.0 million and operating income
of $7.4 million for the second quarter of 2013, as compared to net loss of
$2.5 million and operating income of $3.8 million for the same period in the
prior year.

All vessels operated well throughout the quarter with virtually 100 percent
utilization, and operating results improved compared to the second quarter of
2012 as the offshore shuttle tanker “Windsor Knutsen” was off hire due to
propeller damage, causing reduced utilization days and repair costs during
that period.

Net financial expenses decreased to $3.4 million for the second quarter of
2013, compared to $7.2 million for the same period in the prior year.

In accordance with generally accepted accounting principles in the United
States (“GAAP”), prior to April 16, 2013, the results of operations, cash flow
and balance sheet of the Partnership have been carved out of the consolidated
financial statements of KNOT. Accordingly, the Partnership’s financial
statements prior to April 16, 2013 reflect allocation of certain expenses,
including the mark-to-market value of interest rate swap derivatives. These
realized and unrealized losses on derivatives, in the amounts of $0.4 million
and $4.5 million for the second quarter of 2013 and 2012, respectively, do not
affect cash flow or the calculation of distributable cash flow. These amounts
have been eliminated from the Partnership’s opening equity as of April 16,
2013, as none of the interest rate swap agreements were transferred to the
Partnership on completion of the IPO. The Partnership has no further
obligation related to these contracts.

Financing and Liquidity

On April 15, 2013, the Partnership completed its IPO of 8,567,500 common units
(including 1,117,500 common units pursuant to the exercise in full of the
underwriters’ option to purchase additional common units). The Partnership’s
common units are listed on the New York Stock Exchange under the symbol
“KNOP.” KNOT owns a 49.0% limited partner interest in the Partnership and,
through its ownership of the Partnership’s general partner, a 2.0% general
partner interest in the Partnership.

As of June 30, 2013, the Partnership had cash and cash equivalents of $27.1
million and an undrawn revolving credit facility of $20 million. Total bank
debt outstanding was $217.5 million, as of June 30, 2013. The average margin
paid on the Partnership’s outstanding bank debt during the quarter ended June
30, 2013 was approximately 2.7% in addition to LIBOR.

Outlook

Third quarter 2013 operating results will be positively impacted by two months
of contribution from the offshore shuttle tanker “Carmen Knutsen” and the
Partnership’s management has recommended that the Board consider an increase
of $0.06 in the quarterly cash distribution, which would represent an increase
of 16.0% (an annualized increase of $0.24 from the current annualized
distribution rate of $1.50 per common unit), which would become effective for
the distribution with respect to the quarter ending September 30, 2013. Any
such increase would be conditioned upon, among other things, the approval of
such increase by the Board and the absence of any material adverse
developments that would make such an increase inadvisable.

Further, under the Omnibus Agreement the Partnership entered into with KNOT in
connection with the IPO ( the “Omnibus Agreement”), there are four additional
identified vessels which the Partnership has the option to purchase within 24
months of their delivery to charterers.

Pursuant to the Omnibus Agreement, the Partnership also has the option to
acquire from KNOT all offshore shuttle tankers that KNOT acquires or owns that
will be employed under contracts for periods more than five years.

Although in the short term, production delays in both Brazil and the North Sea
are causing a temporary vessel surplus, the Board believes that through KNOT
there are significant opportunities for growth for the Partnership as the
activity in the offshore oil industry continues to be relatively high and,
accordingly, the demand for offshore shuttle tankers will over time continue
to grow based on identified projects.

The Board is pleased with the results of operations of the Partnership for the
period ended June 30, 2013, which were consistent with expectations for the
Partnership’s initial operating period following the completion of the IPO,
and is confident that the Partnership is well-positioned to grow its earnings
and distributions.

Expected Restatement of 2012 Results

Following discussions with the Partnership’s auditors, on August 23, 2013, the
Partnership and the Board have determined to restate the combined carve-out
financial statements of KNOT Offshore Partners LP Predecessor as of and for
the year ended December 31, 2012. The purpose of such restatement is to
correct certain errors in accounting for expenses associated with the IPO and
reflect on the combined carve-out statement of operations, in general and
administrative expenses, such expenses that had previously been deferred and
reflected as a reduction on the combined carve-out balance sheet in owner’s
equity.

The Partnership expects the amount of additional general and administrative
expenses that will be reflected in the restatement will be approximately
$3.439 million for the year ended December 31, 2012, resulting in a reduction
of net income from $4.184 million previously reported to approximately $0.745
million as restated.

Expenses associated with the IPO aggregated approximately $1.501 million for
the three months ended March 31, 2013 and approximately $0.448 million for the
three months ended June 30, 2013.

Since these expenses were funded from IPO proceeds, as described in the IPO
prospectus filed with the Securities and Exchange Commission, the restatement
will have no impact on the cash available for distribution to unitholders. The
Partnership expects to issue the restated financial statements in
approximately two weeks.

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 five offshore
shuttle tankers operating under long-term charters to oil majors.

KNOT Offshore Partners LP 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 also plans to host a conference call on Tuesday, August 27,
2013 at noon (ET) to discuss the results for the second quarter of 2013. All
unitholders and interested parties are invited to listen to the live
conference call by choosing from the following options:

  *By dialing 1-877-524-6789 or 1-412-317-6789, if outside North America.
  *By accessing the webcast, which will be available on the Partnership’s
    website: www.knotoffshorepartners.com.

August 26, 2013
KNOT Offshore Partners L.P.
Aberdeen, United Kingdom

Questions should be directed to:
Arild Vik (+44 7581 899777)


SUMMARY UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT STATEMENTS OF
OPERATIONS
                                                            
                                               Three months     Three months

(USD in thousands)                            Ended June 30,  Ended June 30,

                                               2013             2012
Time charter and bareboat revenues 1)         17,268          12,000
Loss of hire insurance recoveries              -                2,217
Total revenues                                 17,268           14,217
Vessel operating expenses                      3,251            4,853
Depreciation and amortization                  5,340            5,311
General and administrative expenses 2)         1,269            275
Total operating expenses                       9,860            10,439
Operating income                               7,408            3,778
Finance income (expense):
Interest income                                3                13
Interest expense 3)                            (2,529      )    (3,395    )
Other finance expense 4)                       (492        )    (873      )
Realized and unrealized loss on derivative     (434        )    (4,507    )
instruments 5)
Net gain (loss) on foreign currency            15               1,606
transactions
Total finance expense                          (3,437      )    (7,156    )
Income (loss) before income taxes              3,971            (3,378    )
Income tax benefit                             -                842
Net income (loss)                              3,971            (2,536    )
Net income (loss) attributable to              -                -
non-controlling interests
Net income (loss) attributable to KNOT         3,971            (2,536    )
Offshore Partners LP Owners
                                                                
Weighted average units outstanding (in
thousands of units):
Common units                                   8 567 500
Subordinated units                             8 567 500
General partner units                         349 694        

         Time charter revenue for the second quarter of 2013 include, non-cash
  1)  item of approximately $0.5 million in reversal of contract liability
         provision.
    2)   General and administrative expenses for second quarter of 2013
         includes $0.5 million in costs related to the IPO.
         Interest expense for the second quarter of 2013 includes non-cash
    3)   item of approximately $0.6 million in amortization of previously
         capitalized loan cost related to debt repaid at IPO.
         Other finance expense for the second quarter of 2013 includes legal
    4)   costs of approximately $0.4 million relating to loans with an average
         remaining term of 3.4 years.
         Realized and unrealized loss on derivative instruments is related to
    5)   interest rate swaps not transferred to the Partnership by KNOT NYK
         Offshore Tankers AS at the date of the IPO.
         

SUMMARY UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT BALANCE SHEET
                                                         
                                                          At June 30,
                                                     
(USD in thousands)                                         2013
ASSETS                                               
Current assets:
Cash and cash equivalents                                  25,218
Restricted cash                                            1,910
Trade accounts receivable                                  -
Amounts due from related parties                           857
Inventories                                                489
Deferred tax asset                                         -
Other current assets                                       1,571
Total current assets                                       30,045
Long-term assets:
Vessels and equipment:
Vessels                                                    548,141
Less accumulated depreciation and amortization             (62,053      )
Net property, plant, and equipment                         486,088
Goodwill                                                   5,750
Deferred debt issuance cost                                2,336
Total assets                                               524,219
                                                           
LIABILITIES AND PARTNERS’ EQUITY/OWNER’S CAPITAL
Current liabilities:
Trade accounts payable                                     428
Accrued expenses                                           3,411
Current installments of long-term debt                     17,402
Derivative liabilities                                     -
Income taxes payable                                       600
Contract liabilities                                       1,518
Prepaid charter and deferred revenue                       590
Amount due to related parties                              2,655
Total current liabilities                                  26,604
Long-term liabilities:
Long-term debt, excluding current installments             200,051
Derivative liabilities                                     -
Contract liabilities                                       13,552
Deferred tax liabilities                                   2,400
Other long-term liabilities                                781
Total liabilities                                          243,388
Equity:
Owner’s equity
Partner’s capital:
Common unitholders                                         168,830
Subordinated unitholders                                   106,701
General partner interest                                   5,300
Total Partners’ capital                                    280,831
Total liabilities and equity                               524,219
                                                                     
                                                                        

As of April 16, 2013, the financial statements of the Partnership as a
separate legal entity are presented on a consolidated basis. Prior to April
16, 2013, the results of operations, cash flow and balance sheet have been
carved out of the consolidated financial statements of KNOT NYK Offshore
Tankers AS and therefore are presented on a combined carve-out basis. The
combined entity’s historical combined financial statements include assets,
liabilities, revenues, expenses and cash flows directly attributable to the
Partnership’s interests in the four vessels in its initial fleet. Accordingly,
the historical combined carve-out interim financial statements prior to April
16, 2013 reflect allocations of certain expenses, including that of general
and administrative expenses, mark-to-market valuations of interest rate swap
derivatives, interest expense on related party payables, and net gain (loss)
on foreign currency transactions.. The basis for the allocations are described
in note 2 of the audited combined financial statements for the year ended
December 31, 2012 contained in the Registration Statement filed by KNOT
Offshore Partners with the U.S. Securities and Exchange Commission in
connection with the IPO. These allocated costs have been accounted for as an
equity contribution in the combined balance sheets.

APPENDIX A - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Distributable Cash Flow (“DCF”)

Distributable cash flow represents net income adjusted for depreciation and
amortization, unrealized gains and losses from derivatives, unrealized foreign
exchange gains and losses, other non-cash items, estimated maintenance and
replacement capital expenditures. Estimated maintenance and replacement
capital expenditures, including estimated expenditures for drydocking,
represent capital expenditures required to maintain over the long-term the
operating capacity of, or the revenue generated by our capital assets.
Distributable cash flow is a quantitative standard used by investors in
publicly-traded partnerships to assist in evaluating a partnership's ability
to make quarterly cash distributions. Distributable cash flow is a non-GAAP
financial measure and should not be considered as an alternative to net income
or any other indicator of KNOT Offshore Partner's performance calculated in
accordance with GAAP. The table below reconciles distributable cash flow to
net income, the most directly comparable GAAP measure.

                                                              
                                                                Three months

                                                                Ended June 30,
                                                             
                                                                2013
(USD in thousands)
                                                                (unaudited)
Net income                                                     3,971
Add:
Depreciation and amortization                                   5,340
Unrealized loss from interest rate derivatives                  434
IPO expenses covered by Knutsen NYK Offshore Partners AS        60
Other non-cash items; deferred costs amortization debt          870
                                                                
                                                                
Less:
Estimated maintenance and replacement capital expenditures      (2,980    )
(including drydocking reserve)
Other non-cash items; reversal of contract provision            (477      )
                                                              
Distributable cash flow                                        7,218     
                                                                          

Adjusted EBITDA

Adjusted EBITDA refers to earnings before interest, other financial items,
taxes, non-controlling interest, depreciation and amortization. Adjusted
EBITDA is a non-GAAP financial measure used by investors to measure our
performance.

The Partnership believes that adjusted EBITDA assists its management and
investors by increasing the comparability of its performance from period to
period and against the performance of other companies in its industry that
provide adjusted EBITDA information. This increased comparability is achieved
by excluding the potentially disparate effects between periods or companies of
interest, other financial items, taxes and depreciation and amortization,
which items are affected by various and possibly changing financing methods,
capital structure and historical cost basis and which items may significantly
affect net income between periods. The Partnership believes that including
adjusted EBITDA as a financial measure benefits investors in (a) selecting
between investing in the Partnership and other investment alternatives and (b)
monitoring the Partnership's ongoing financial and operational strength in
assessing whether to continue to hold common units. Adjusted EBITDA is a
non-GAAP financial measure and should not be considered as an alternative to
net income or any other indicator of Partnership performance calculated in
accordance with GAAP. The table below reconciles Adjusted EBITDA to net
income, the most directly comparable GAAP measure.

                              
                                Three months

                                Ended June 30,
                             
                                2013
(USD in thousands)
                                (unaudited)
Net income                     3,971
Interest income                 (3        )
Interest expenses               2,529
Depreciation and amortization   5,340
Income tax (benefits) expense   -
EBITDA                          11,837
Other financial items ^(a)     911       
Adjusted EBITDA                12,748    

        Other financial items consist of other finance expense, realized and
 (a)  unrealized loss on derivative instruments and net loss on foreign
        currency transactions.
        

                          FORWARD LOOKING STATEMENTS

This press release contains certain forward-looking statements concerning
future events and KNOT Offshore Partners operations, performance and financial
condition. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate or imply future results,
performance or achievements, and may contain the words “believe,”
“anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,”
“will likely result,” “plan,” “intend” or words or phrases of similar
meanings. These statements involve known and unknown risks and are based upon
a number of assumptions and estimates that are inherently subject to
significant uncertainties and contingencies, many of which are beyond KNOT
Offshore Partners control. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Important factors
that could cause actual results to differ materially include, but are not
limited to:

  
    statements about market trends in the shuttle tanker or general tanker
•   industries, including charter rates, factors affecting supply and demand,
    and opportunities for the profitable operations of offshore shuttle
    tankers;
    
    statements about KNOT’s and KNOT Offshore Partners’ ability to build and
•   retrofit offshore shuttle tankers and the timing of the delivery and
    acceptance of any such retrofitted vessels by their respective charterers;
    
•   KNOT Offshore Partners’ ability to increase distributions and the amount
    of any such increase;
    
•   the contributions to KNOT Offshore Partners' operating results of the
    Carmen Knutsen, which KNOT Offshore Partners acquired  in August 2013;
    
    KNOT Offshore Partners’ ability to integrate and realize the expected
•   benefits from acquisitions, including the acquisition of the Carmen
    Knutsen;
    
•   KNOT Offshore Partners’ anticipated growth strategies;
    
•   the effect of the worldwide economic slowdown;
    
•   turmoil in the global financial markets;
    
•   fluctuations in currencies and interest rates;
    
•   general market conditions, including fluctuations in charter hire rates
    and vessel values;
    
•   changes in KNOT Offshore Partners’ operating expenses, including
    drydocking and insurance costs and bunker prices;
    
•   forecasts of KNOT Offshore Partners’ ability to make cash distributions on
    the units or any increases in cash distributions;
    
•   KNOT Offshore Partners’ future financial condition or results of
    operations and future revenues and expenses;
    
•   the repayment of debt and settling of any interest rate swaps;
    
•   KNOT Offshore Partners’ ability to make additional borrowings and to
    access debt and equity markets;
    
•   planned capital expenditures and availability of capital resources to fund
    capital expenditures;
    
•   KNOT Offshore Partners’ ability to maintain long-term relationships with
    major users of shuttle tonnage;
    
•   KNOT Offshore Partners’ ability to leverage KNOT’s relationships and
    reputation in the shipping industry;
    
•   KNOT Offshore Partners’ ability to purchase vessels from KNOT in the
    future;
    
•   KNOT Offshore Partners’ continued ability to enter into long-term time
    charters;
    
    KNOT Offshore Partners’ ability to maximize the use of its vessels,
•   including the re-deployment or disposition of vessels no longer under
    long-term time charter;
    
•   timely purchases and deliveries of newbuilding vessels;
    
•   future purchase prices of newbuildings and secondhand vessels;
    
•   KNOT Offshore Partners’ ability to compete successfully for future
    chartering and newbuilding opportunities;
•   acceptance of a vessel by its charterer;
    
•   termination dates and extensions of charters;
    
    the expected cost of, and KNOT Offshore Partners’ ability to, comply with
•   governmental regulations, maritime self-regulatory organization standards,
    as well as standard regulations imposed by its charterers applicable to
    KNOT Offshore Partners’ business;
    
•   availability of skilled labor, vessel crews and management;
    
    KNOT Offshore Partners’ general and administrative expenses and its fees
•   and expenses payable under the fleet management agreements and the
    management and administrative services agreement;
    
•   the anticipated taxation of KNOT Offshore Partners and distributions to
    KNOT Offshore Partners’ unitholders;
    
•   estimated future maintenance and replacement capital expenditures;
    
•   KNOT Offshore Partners’ ability to retain key employees;
    
•   customers' increasing emphasis on environmental and safety concerns;
    
•   potential liability from any pending or future litigation;
    
•   potential disruption of shipping routes due to accidents, political
    events, piracy or acts by terrorists;
    
•   future sales of KNOT Offshore Partners’ securities in the public market;
    
•   KNOT Offshore Partners’ business strategy and other plans and objectives
    for future operations; and
    
    other factors listed from time to time in the reports and other documents
•   that KNOT Offshore Partners files with the Securities and Exchange
    Commission.

All forward-looking statements included in this release are made only as of
the date of this release on. New factors emerge from time to time, and it is
not possible for KNOT Offshore Partners to predict all of these factors.
Further, KNOT Offshore Partners cannot assess the impact of each such factor
on its business or the extent to which any factor, or combination of factors,
may cause actual results to be materially different from those contained in
any forward-looking statement. KNOT Offshore Partners does not intend to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in KNOT Offshore Partners expectations
with respect thereto or any change in events, conditions or circumstances on
which any such statement is based.

     Adjusted EBITDA is a non-GAAP financial measure used by investors to
^1  measure the performance of master limited partnerships. Please see
     Appendix A for a reconciliation to the most directly comparable GAAP
     financial measure.
     Distributable cash flow is a non-GAAP financial measure used by investors
^2   to measure the performance of master limited partnerships. Please see
     Appendix A for a reconciliation to the most directly comparable GAAP
     financial measure.

Contact:

KNOT Offshore Partners LP
Arild Vik, +44 7581 899777