KNOT Offshore Partners LP Earnings Release - Interim Results for the Period Ended December 31, 2013

  KNOT Offshore Partners LP Earnings Release - Interim Results for the Period
  Ended December 31, 2013

Highlights

  *For the fourth quarter of 2013, KNOT Offshore Partners LP (“KNOT Offshore
    Partners” or the “Partnership”):
  *Generated net income of $7.9 million and operating income of $10.0
    million;
  *Generated Adjusted EBITDA of $16.8 million;^(1) and
  *Generated distributable cash flow of $9.8 million.^(2)
  *On February 14, 2014, KNOT Offshore Partners paid a quarterly distribution
    of $0.4350 per unit with respect to the quarter ended December 31, 2013.
    This corresponds to a distribution of $1.74 per unit on an annual basis.

Business Wire

ABERDEEN, Scotland -- February 19, 2014

Financial Results Overview

KNOT Offshore Partners reports net income of $7.9 million and operating income
of $10.0 million for the fourth quarter of 2013, as compared to net income of
$1.5 million and operating income of $5.7 million for the same period in the
prior year.

All vessels operated well throughout the quarter with 98.5% utilization (3.5
days offhire). Operating income increased by $4.3 million and finance expenses
decreased by $1.5 million in the fourth quarter of 2013 compared to the fourth
quarter of 2012. The increase in operating income is due to the Carmen Knutsen
being included in the Partnership’s operating results for the full fourth
quarter of 2013. The reduction in finance expense was primarily related to the
repayment of debt in connection with the Partnership’s initial public offering
in April2013 (the “IPO”) and transfer of mark to market costs related to
interest rate swaps entered into prior to the IPO to the Partnership’s
sponsor, Knutsen NYK Offshore Tankers AS (“KNOT”).

      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
(2)   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 April 16, 2013 reflect allocation of certain
expenses, including the mark-to-market value of interest rate swap
derivatives. The realized and unrealized gain on derivatives, in the amounts
of $0.1 million for the fourth quarter 2012 do not affect cash flow or the
calculation of distributable cash flow whilst the realized and unrealized gain
for fourth quarter 2013 of $0.9 million decrease the distributable cash flow.
The amount for the fourth 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.

Financing and Liquidity

On April15, 2013, the Partnership completed its IPO of 8,567,500 common units
(including 1,117,500 common units sold 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.

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.

As of December31, 2013, the Partnership had cash and cash equivalents of
$28.8 million. Total interest bearing debt outstanding was $350.0 million, as
of December31, 2013. The average margin paid on the Partnership’s outstanding
debt during the quarter ended December31, 2013 was approximately 2.7% over
LIBOR.

As of December 31, 2013, the Partnership has entered into various interest
rate swap agreements effective until March, April and May, 2018, for a total
notional amount of $200 million to hedge against the interest rate risks of
its variable-rate borrowings. 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. 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 February 2014, the Partnership entered into two interest rate swap
agreements effective in February 2014, and ending in August 2018. The interest
rate swap agreements have a total initial notional amount of $50.0 million.
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 of 1.45%.

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.

We have been advised that KNOT has entered into a contract to purchase three
vessels from J. Lauritzen, of which two, the “Dan Sabia” and the “Dan Cisne”,
are on long-term bareboat charters to Transpetro ending in the third quarter
of 2023 and first quarter of 2024, respectively. The closing of the
acquisition is subject to technical inspection and approval from the
charterer. Upon consummation of the acquisition, we anticipate that the Dan
Sabia and the Dan Cisne will be offered to the Partnership under the terms of
the Omnibus Agreement. There can be no assurance that KNOT’s acquisition of
these vessels will be consummated or that the Partnership will acquire such
vessels from KNOT.

BG Group (“BG”) is in the process of considering whether to exercise its
option to extend its charter of the Windsor Knutsen for one year. BG has the
option to extend its charter for the Windsor Knutsen up to April 2016. The
initial term of the Windsor Knutsen charter with BG expires in April 2014.
Pursuant to the Omnibus Agreement, in the event that BG does not extend its
charter, KNOT will guarantee the rate of hire for the Windsor Knutsen until
April 2018.

Production delays related to new projects are continuing both in Brazil and
the North Sea, causing a temporary vessel surplus since vessels targeting said
projects are being delivered. The Board of Directors of the Partnership (the
“Board”) believes that through the Partnership’s relationship with KNOT, there
are significant opportunities for growth for the Partnership. Activity in the
offshore oil industry continues to be relatively high based on identified
projects and, accordingly, the demand for offshore shuttle tankers is expected
to continue to grow.

The Board is pleased with the results of operations of the Partnership for the
period ended December 31, 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 Wednesday, February 19,
2014 at noon (ET) to discuss the results for the fourth 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

February 19, 2014

KNOT Offshore Partners LP

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                                                 Year Ended                                  
                                                                                            December 31,
(USD in               December 31,            September 30,       December 31,
thousands)                                                                             2013                  2012
                      2013                    2013                2012
Time charter
and bareboat            22,216                20,454            16,819                  73,151                        62,078
revenues 1)
Loss of hire
insurance                 —                       —                   —                         250                            3,575
recoveries
Total revenues            22,216                  20,454              16,819                    73,401                          65,653
Vessel
operating                 4,427                   3,830               3,355                     14,288                          13,000
expenses
Depreciation
and                       6,785                   6,304               5,282                     23,768                          21,181
amortization
General and
administrative            1,001                   960                 2,505                     5,361                           4,834
expenses
Total operating           12,213                  11,094              11,142                    43,417                          39,015
expenses
Operating                 10,003                  9,360               5,677                     29,984                          26,638
income
Finance income
(expense):
Interest income           5                       16                  4                         30                              19
Interest                  (2,832      )           (2,653      )       (3,126        )           (10,773       )                 (13,471   )
expense
Other finance             (250        )           (150        )       (810          )           (2,048        )                 (3,378    )
expense
Realized and
unrealized gain
(loss)                    845                     (252        )       136                       505                             (6,031    )

on derivative
instruments
Net gain (loss)
on foreign                20                      31                  78                        193                             (1,771    )
currency
transactions
Total finance             (2,212      )           (3,008      )       (3,718        )           (12,093       )                 (24,632   )
expense
Income before             7,791                   6,352               1,959                     17,891                          2,006
income taxes
Income tax
benefit                   111                     5                   (484          )           (2,827        )                 (1,261    )
(expense) 2)
Net income                7,902                   6,357               1,475                     15,064                          745
Net income
attributable to           —                       —                   —                         —                               —
non-controlling
interests
Net income
(loss)
attributable to
                          7,902                   6,357               1,475                     15,064                          745
KNOT Offshore
Partners LP
Owners
                                                                                                                                            
Weighted
average units
outstanding                                                            

(in thousands
of units):
                          8,567,500               8,567,500                                     8,567,500
Subordinated              8,567,500               8,567,500                                     8,567,500
units
General partner           349,694                 349,694                                       349,694
units

     Time charter revenue for the fourth and for the third quarter of 2013
1)  include a non-cash item of approximately $0.5 million in reversal of
     contract liability provision.
2)   Tax benefit is currency effect on taxes payable

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT BALANCE SHEET

                                            
                      At December            At              At December
(USD in               31,                    September       31,
thousands)                               30,                       
                      2013                                   2012
                                             2013
ASSETS                                                      
Current assets:
Cash and cash              28,836            28,483              1,287
equivalents
Restricted cash            458               1,461               830
Trade accounts             —                 —                   99
receivable
Amounts due
from related               77                145                 —
parties
Inventories                578               680                 541
Deferred tax               —                 —                   290
asset
Derivative                 248               —                   —
assets
Other current              1,814             2,335               3,459
assets
Total current              32,011            33,104              6,506
assets
Long-term
assets:
Vessels and
equipment:
Vessels                    692,927           692,911             548,141
Less
accumulated
depreciation               (75,142   )       (68,357     )       (51,373   )
and
amortization
Net property,
plant, and                 617,785           624,554             496,768
equipment
Goodwill                   5,750             5,750               5,750
Deferred debt              2,010             2,233               2,787
issuance cost
Derivative                 2,617             —                   —
assets
Total assets               660,173           665,641             511,811
                                                                             
LIABILITIES AND
PARTNERS’
EQUITY/OWNER’S
CAPITAL
Current
liabilities:
Trade accounts             1,107             1,337               370
payable
Accrued                    2,642             4,246               1,803
expenses
Current
installments of            29,269            29,044              28,833
long-term debt
Derivative                 2,124             252                 5,258
liabilities
Income taxes               743               746                 —
payable
Contract                   1,518             1,518               1,518
liabilities
Prepaid charter
and deferred               4,471             2,371               4,369
revenue
Amount due to              163               444                 12,423
related parties
Total current              42,037            39,958              54,574
liabilities
Long-term
liabilities:
Long-term debt,
excluding                  310,359           317,596             319,017
current
installments
Derivative                 —                 —                   22,622
liabilities
Contract                   12,793            13,173              14,311
liabilities
Deferred tax               2,141             2,249               3,097
liabilities
Long-term debt
from related               10,349            10,349
parties
Other long-term            567               675                 996
liabilities
Total                      378,246           384,000             414,617
liabilities
Equity:
Owner’s equity                                                   97,194
Partner’s
capital:
Common                     168,773           168,632             —
unitholders
Subordinated               107,857           107,717             —
unitholders
General partner            5,297             5,292               —
interest
Total Partners’            281,927           281,641             —
capital
Total
liabilities and       660,173      665,641        511,811  
equity

As of April16, 2013, the financial statements of the Partnership as a
separate legal entity are presented on a consolidated basis. Prior to
April16, 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 April16, 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 December31, 2012 filed by KNOT Offshore
Partners with the U.S. Securities and Exchange Commission (the “SEC”) on
September6, 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

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
(USD in thousands)                                    Ended December 31,
                                                      2013
                                                      (unaudited)
Net income                                                      7,902
Add:
Depreciation and amortization                                   6,785
Other non-cash items; deferred costs                            287
amortization debt
                                                                             
Less:
Estimated maintenance and replacement capital                   (3,738     )
expenditures (including drydocking reserve)
Deferred revenue                                                (486       )
Unrealized gain from interest rate derivatives                (994       )
and forward exchange currency contracts
                                                                             
Distributable cash flow                                       9,756

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
(USD in thousands)                  Ended December 31,
                                    2013
                                    (unaudited)
Net income                                    7,902
Interest income                               (5         )
Interest expenses                             2,832
Depreciation and amortization                 6,785
Income tax (benefits) expense                 (111       )
EBITDA                                        17,403
Other financial items (a)                   (615       )
                                                           
Adjusted EBITDA                             16,788

    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;

• KNOT Offshore Partners’ ability to integrate and realize the expected
benefits from acquisitions;

• 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 LP
Arild Vik
+44 7581 899777
 
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