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

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

Business Wire

ABERDEEN, Scotland -- November 25, 2013

KNOT Offshore Partners L.P. (NYSE:KNOP):

Highlights

• For the third quarter of 2013, KNOT Offshore Partners LP (“KNOT Offshore
Partners” or the “Partnership”):

- Generated net income of $6.4 million and operating income of $9.4 million;

- Generated Adjusted EBITDA of $15.7 million;^1 and

- Generated distributable cash flow of $9.3 million.^2

• On November 14, 2013, KNOT Offshore Partners paid a quarterly distribution
of $0.4350 per unit with respect to the quarter ended September 30, 2013. This
corresponds to a distribution of $1.74 per unit on an annual basis.

• 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 $6.4 million and operating income
of $9.4 million for the third quarter of 2013, as compared to net income of
$0.2 million and operating income of $9.1 million for the same period in the
prior year.

All vessels operated well throughout the quarter with 98.5 percent utilization
(3.4 days offhire). Operating income increased by $0.2 million and finance
expenses decreased by $5.0 million in the third quarter of 2013 compared to
the third quarter of 2012. The reduction in finance expense was primarily
related to reduction of debt, mark to market costs related to prior interest
rate swaps being transferred to the Partnership’s sponsor, KNOT and loss on
currency transactions related to the construction of new vessels.

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

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

In accordance with generally accepted accounting principles in the United
States (“GAAP”), prior to April16, 2013, the results of operations, cash
flows 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 April16, 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 third quarter of 2013 and
2012, respectively, do not affect cash flow or the calculation of
distributable cash flow. The amount for the third quarter of 2012 has been
eliminated from the Partnership’s opening equity as of April16, 2013, as none
of KNOT’s interest rate swap agreements were transferred to the Partnership on
completion of the IPO. The Partnership has no further obligations related to
these contracts.

Carmen Knutsen Acquisition

On August 1, 2013, the Partnership’s wholly owned subsidiary, KNOT Shuttle
Tankers AS acquired Knutsen Shuttle Tankers 13 AS, the company that owns the
shuttle tanker Carmen Knutsen, from KNOT for a purchase price of $145.0
million less approximately $89.1 million of existing bank debt (the “Carmen
Knutsen Loan”) and other purchase price adjustment of $0.1 million.

The purchase price was settled by way of a cash payment of approximately $45.4
million and with seller financing provided by KNOT in the form of a loan in
the amount of approximately $10.5 million (the “ Seller Loan ”).The existing
senior loan facility related to the Fortaleza Knutsen and the Recife Knutsen
was amended to increase borrowing capacity by approximately $25.4 million, and
the cash payment was financed through a drawdown made under this amended
senior loan facility, as well as under the existing loan facility related to
the Bodil Knutsen.

The Carmen Knutsen Loan matures in January 2018 and bears interest at a rate
of LIBOR plus a margin of 2.5% per annum. The Seller Loan is non-amortizing
and matures in five years. The Seller Loan bears interest at a rate of
six-month LIBOR plus a margin of 4.50%per annum.

The Carmen Knutsen is a 157,000 deadweight ton shuttle tanker, built by
Hyundai Heavy Industries and delivered to KNOT in January 2013. It is
operating under a five-year contract with Repsol Sinopec Brasil, B.V.
(“Repsol”), with a remaining firm contract period of approximately 4.5 years.
Repsol has the right to extend the charter term for up to an additional three
years.

Financing and Liquidity

On April15, 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 September 30, 2013, the Partnership had cash and cash equivalents of
$28.5 million. Total bank debt outstanding was $346.6 million, as of September
30, 2013. The average margin paid on the Partnership’s outstanding bank debt
during the quarter ended September 30, 2013 was approximately 2.7% over LIBOR.

In September 2013, the Partnership entered into an interest rate swap
agreement effective on September 19, 2013, and ending on March 19, 2018. The
Partnership entered into this derivative instrument to hedge against the
interest rate risks of its variable-rate borrowings. The interest rate swap
has an initial notional amount of $50.0 million. Under the terms of the
interest rate swap agreement, the Partnership will receive from the
counterparty interest on the notional amount based on three-month LIBOR and
will pay to the counterparty a fixed rate.

In October 2013, the Partnership entered into interest rate swap agreements
effective in October, 2013 and ending in April, 2018 to increase the hedge
against the interest rate risks of its variable-rate borrowings. The interest
rate swaps have an initial notional amount of $100.0 million in total. Under
the terms of the interest rate swap agreements, the Partnership will receive
from the counterparty interest on the notional amount based on three-month
LIBOR and will pay to the counterparty a fixed rate.

In November 2013, the Partnership entered into interest swap agreement
effective in November, 2013 and ending in May, 2018. The interest rate swaps
have an initial notional amount of $50.0 million in total. Under the terms of
the interest rate swap agreement, the Partnership will receive from the
counterparty interest on the notional amount based on three-month LIBOR and
will pay to the counterparty a fixed rate.

For the interest rate swap agreements above, the Partnership will pay to the
counterparty a fixed rate ranging from 1.25% to 1.44%.

In November 2013, the Partnership entered into foreign exchange forward
contracts, selling a total notional amount of $20.0 million against Norwegian
Kroner (“NOK”) at an average exchange rate of 6.22 NOK/$, which are economic
hedges for certain vessel operating expenses and general and administrative
expenses in NOK.

Outlook

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
continues to cause temporary vessel surplus, the Board of Directors of the
Partnership 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 September 30, 2013, which were consistent with expectations for
the Partnership’s initial operations following the completion of the IPO, and
is confident that the Partnership continues to be well positioned to grow its
earnings and distributions.

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 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 Tuesday, November 26, 2013
at noon (ET) to discuss the results for the third 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 1-866-270-1533 or 1-412-317-0797, if outside North America.

• By accessing the webcast, which will be available on the Partnership’s
website: www.knotoffshorepartners.com

November 25, 2013
KNOT Offshore Partners L.P.
Aberdeen, United Kingdom

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

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT STATEMENTS OF
OPERATIONS

                                Three Months Ended        Nine Months Ended
                                                      
                                September 30,             September 30,
(USD in thousands)             2013         2012      2013     2012
Time charter and bareboat       20,454       16,555    50,934   45,259
revenues 1)
Loss of hire insurance          -             1,358       250       3,575
recoveries
Total revenues                  20,454        17,913      51,184    48,834
Vessel operating expenses       3,830         1,735       9,861     9,645
Depreciation and amortization   6,304         5,278       16,984    15,899
General and administrative      960           1,778       4,359     2,328
expenses
Total operating expenses        11,094        8,791       31,204    27,873
Operating income                9,360         9,122       19,980    20,961
Finance income (expense):
Interest income                 16            2           25        15
Interest expense                (2,653)       (3,407)     (7,941)   (10,345)
Other finance expense           (150)         (821)       (1,798)   (2,568)
Realized and unrealized loss    (252)         (2,109)     (339)     (6,167)
on derivative instruments
Net gain (loss) on foreign      31            (1,682)     173       (1,849)
currency transactions
Total finance expense           (3,008)       (8,017)     (9,880)   (20,914)
Income (loss) before income     6,352         1,105       10,100    47
taxes
Income tax benefit              5             (953)       (2,938)   (777)
Net income (loss)               6,357         152         7,162     (730)
Net income (loss)
attributable to                 -             -           -         -
non-controlling interests
Net income (loss)
attributable to KNOT Offshore   6,357         152         7,162     (730)
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                      
                                                                             

1) Time charter revenue for the third quarter of 2013 include, non-cash item
of approximately $0.5 million in reversal of contract liability provision.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT BALANCE SHEET

                                       At September 30,     At December 31,
                                                         
(USD in thousands)                      2013                 2012
ASSETS
Current assets:
Cash and cash equivalents               28,483               1,287
Restricted cash                         1,461                830
Trade accounts receivable               -                    99
Amounts due from related parties        145                  -
Inventories                             680                  541
Deferred tax asset                      -                    290
Other current assets                    2,335                3,459
Total current assets                    33,104               6,506
Long-term assets:
Vessels and equipment:
Vessels                                 692,911              548,141
Less accumulated depreciation and       (68,357)             (51,373)
amortization
Net property, plant, and equipment      624,554              496,768
Goodwill                                5,750                5,750
Deferred debt issuance cost             2,233                2,787
Total assets                            665,641              511,811
                                                                             
LIABILITIES AND PARTNERS’
EQUITY/OWNER’S CAPITAL
Current liabilities:
Trade accounts payable                  1,337                370
Accrued expenses                        4,246                1,803
Current installments of long-term       29,044               28,833
debt
Derivative liabilities                  252                  5,258
Income taxes payable                    746                  -
Contract liabilities                    1,518                1,518
Prepaid charter and deferred revenue    2,371                4,369
Amount due to related parties           444                  12,423
Total current liabilities               39,959               54,574
Long-term liabilities:
Long-term debt, excluding current       317,596              319,017
installments
Derivative liabilities                  -                    22,622
Contract liabilities                    13,173               14,311
Deferred tax liabilities                2,249                3,097
Long-term debt from related parties     10,349
Other long-term liabilities             675                  996
Total liabilities                       384,001              414,617
Equity:
Owner’s equity                                               97,194
Partner’s capital:
Common unitholders                      168,632              -
Subordinated unitholders                107,717              -
General partner interest                5,292                -
Total Partners’ capital                 281,641              -
Total liabilities and equity            665,642              511,811
                                                                             

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 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 administrative and other expenses, mark-to-market
valuations of interest rate and foreign currency swap derivatives. The basis
for the allocations are described in note 2 of the restated combined financial
statements for the year ended December 31, 2012 filed by KNOT Offshore
Partners with the U.S. Securities and Exchange Commission (the “SEC”) on
September 6, 2013. These allocated costs have been accounted for as an equity
contribution in the combined balance sheets.

APPENDIX A - RECONCILATION 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 and 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 Partners’ 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 September 30,
                                                       
                                                           2013
(USD in thousands)
                                                           (unaudited)
Net income                                               6,357
Add:
Depreciation and amortization                              6,304
Unrealized loss from interest rate derivatives             252
Other non-cash items; deferred costs amortization debt     338
                                                           
Less:
Estimated maintenance and replacement capital              (3,477)
expenditures (including drydocking reserve)
Other non-cash items; reversal of contract provision       (486)
                                                        
Distributable cash flow                                  9,288
                                                           

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 September 30,
                              
                                  2013
(USD in thousands)
                                  (unaudited)
Net income                      6,357
Interest income                   (16)
Interest expenses                 2,653
Depreciation and amortization     6,304
Income tax (benefits) expense     (5)
EBITDA                            15,293
Other financial items ^(a)      371
Adjusted EBITDA                 15,664
                                  

(a) Other financial items consist of other finance expense, realized and
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;

• 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 SEC.

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.

Contact:

KNOT Offshore Partners L.P.
Arild Vik, +44 7581 899777
 
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