Knot Offshore Partners LP Earnings Release - Interim Results for the Period Ended March 31, 2014

  Knot Offshore Partners LP Earnings Release - Interim Results for the Period
  Ended March 31, 2014

Business Wire

ABERDEEN, Scotland -- May 14, 2014

Highlights

  *For the first quarter of 2014 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 $16.1 million;^(1) and
  *Generated distributable cash flow of $8.9 million. ^ (1)
  *On May 15, 2014, KNOT Offshore Partners expects to pay a cash distribution
    of $0.4350 per unit with respect to the quarter ended March31, 2014. This
    corresponds to a distribution of $1.74 per unit on an annualized basis.

Financial Results Overview

KNOT Offshore Partners reports net income of $6.4 million and operating income
of $9.4 million for the first quarter of 2014, as compared to a net loss of
$3.2 million and operating income of $3.2 million for the same period in the
prior year.

All vessels operated well throughout the quarter with 99.0 percent utilization
(2.7 days offhire). Operating income increased by $6.2 million and finance
expense decreased by $0.5 million in the first quarter of 2014 compared to the
first quarter of 2013.

^(1) Adjusted EBITDA and distributable cash flow are non-GAAP financial
measures 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 Knutsen NYK Offshore Tankers AS (“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. The realized and unrealized gain on
derivatives, in the amount of $0.3 million for the first quarter of 2013 did
not affect cash flow or the calculation of distributable cash flow, while the
unrealized gain for the first quarter of 2014 of $0.1 million decreased the
distributable cash flow. The amount for the first quarter of 2013 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 Partnership’s initial public offering. The Partnership has
no further obligations related to these contracts.

Financing and Liquidity

On April15, 2013, the Partnership completed its initial public offering
(“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 well as the
Partnership’s incentive distribution rights.

As of March 31, 2014, the Partnership had cash and cash equivalents of $26.8
million. Total interest bearing debt outstanding was $342.8 million, as of
March 31, 2014. The average margin paid on the Partnership’s outstanding debt
during the quarter ended March 31, 2014 was approximately 2.7% over LIBOR.

As of March 31, 2014, the Partnership has entered into various interest rate
swap agreements effective until March, April, May and August, 2018, for a
total notional amount of $250 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 1.45%.

As of 31 March, 2014, the Partnership’s net exposure to floating interest rate
fluctuations on its outstanding debt was approximately $66.0 million, based on
total net interest bearing debt of approximately $342.8 million less the
notional amount of our floating to fixed interest rate swaps of $250.0
million, and less cash and cash equivalents of $26.8 million.

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.

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 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.

We have been notified that BG Group will not exercise its option to extend the
Windsor Knutsen time charter after the expiration of its initial term. The
vessel will be redelivered during July –August 2014 at BG Group’s option. The
process of reemploying the vessel is ongoing. Pursuant to our Omnibus
Agreement with KNOT, in the event the Windsor Knutsen is not receiving from
any charterer a rate of hire that is equal to or greater than the rate of hire
that would have been in effect in the event BG Group had exercised its option
under the existing Windsor Knutsen charter, KNOT shall pay us such rate of
hire that would have been in effect for a period up to April 15, 2018, subject
to certain limitations as described in our Omnibus Agreement.

The Board of Directors of the Partnership (the “Board”) believes that, through
KNOT there are significant opportunities for growth for the Partnership, and,
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 quarter ended March 31, 2014, 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, May 14, 2013 at
noon (ET) to discuss the results for the first quarter of 2014. 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

May 14, 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

                                                                 Year
                          Three Months Ended      Three Months
                                                Ended         Ended
                          March 31,
                                                  December 31,   December
                                                                 31,
(USD in thousands)        2014         2013      2013           2013
Time charter and          21,766        13,212    22,216         73,151
bareboat revenues 1)
Loss of hire insurance    —             250       —              250
recoveries
Other income              8             —         —
Total revenues            21,774        13,462    22,216         73,401
Vessel operating          4,597         2,780     4,427          14,288
expenses
Depreciation and          6,780         5,340     6,785          23,768
amortization
General and               1,043         2,130     1,001          5,361
administrative expenses
Total operating           12,420        10,250    12,213         43,417
expenses
Operating income          9,354         3,212     10,003         29,984
Finance income
(expense):
Interest income           1             6         5              30
Interest expense          (2,713)       (2,760)   (2,832)        (10,773)
Other finance expense     (221)         (1,156)   (250)          (2,048)
Realized and unrealized
gain ( loss) on           46            347       845            505
derivative instruments
Net gain (loss) on
foreign currency          (24)          127       20             193
transactions
Total finance expense     (2,911)       (3,436)   (2,212)        (12,093)
Income (loss) before      6,443         (224)     7,791          17,891
income taxes
Income tax benefit 2)     (19)          (2,942)   111            (2,827)
Net income (loss)         6,424         (3,166)   7,902          15,064
Net income (loss)
attributable to KNOT      6,424         (3,166)   7,902          15,064
Offshore Partners LP
Owners
                                                                             
Weighted average units
outstanding (in
thousands of units):
Common units              8, 567, 500   —         8, 567, 500    8, 567, 500
Subordinated units        8, 567, 500   —         8, 567, 500    8, 567, 500
General partner units     349, 694      —         349, 694       349, 694

1) Time charter revenue for the first quarter of 2014 and for the fourth
quarter of 2013 includes a non-cash item of approximately $0.5 million in
reversal of contract liability provision.

    UNAUDITED CONDENSED CONSOLIDATED AND COMBINED CARVE-OUT BALANCE SHEET

                                             At March 31,   At December 31,
                                                          
(USD in thousands)                            2014           2013
ASSETS
Current assets:
Cash and cash equivalents                     25,338         28,836
Restricted cash                               1,456          458
Trade accounts receivable                     —              —
Amounts due from related parties              191            77
Inventories                                   658            578
Derivative assets                             —              248
Other current assets                          2,163          1,814
Total current assets                          29,806         32,011
Long-term assets:
Vessels and equipment:
Vessels                                       692,847        692,926
Less accumulated depreciation and             (81,921)       (75,141)
amortization
Net property, plant, and equipment            610,926        617,785
Goodwill                                      5,750          5,750
Deferred debt issuance cost                   1,731          2,010
Derivative asset                              3,641          2,617
Total assets                                  651,854        660,173
                                                                             
LIABILITIES AND PARTNERS’ EQUITY/OWNER’S
CAPITAL
Current liabilities:
Trade accounts payable                        936            1,170
Accrued expenses                              2,705          2,642
Current installments of long-term debt        29,494         29,269
Derivative liabilities                        2,800          2,124
Income taxes payable                          771            743
Contract liabilities                          1,518          1,518
Prepaid charter and deferred revenue          4,413          4,471
Amount due to related parties                 93             163
Total current liabilities                     42,730         42,037
Long-term liabilities:
Long-term debt, excluding current             302,737        310,359
installments
Derivative liabilities                        —              —
Contract liabilities                          12,414         12,793
Deferred tax liabilities                      2,166          2,141
Long-term debt from related parties           10,612         10,349
Other long-term liabilities                   460            567
Total liabilities                             371,119        378,246
Equity:
Owner’s equity
Partner’s capital:
Common unitholders                            168,189        168,773
Subordinated unitholders                      107,273        107,857
General partner interest                      5,273          5,297
Total Partners’ capital                       280,735        281,927
Total liabilities and equity                  651,854        660,173

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 combined financial
statements for the year ended December 31, 2013 filed by KNOT Offshore
Partners with the U.S. Securities and Exchange Commission (the “SEC”) on April
15, 2014. 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 March 31,
                                                           
                                                              2014
(USD in thousands)
                                                              (unaudited)
Net income                                                    6,424
Add:
Depreciation and amortization                                 6,780
Other non-cash items; deferred costs amortization debt        279
Less:
Estimated maintenance and replacement capital expenditures    (3,738)
(including drydocking reserve)
Deferred revenue                                              (486)
Unrealized gain from interest rate derivatives and forward    (99)
exchange currency contracts
Distributable cash flow                                       9,160

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 March 31,
                             
                                2014
(USD in thousands)
                                (unaudited)
Net income                      6,424
Interest income                 (1)
Interest expenses               2,713
Depreciation and amortization   6,780
Income tax (benefits) expense   19
EBITDA                          15,935
Other financial items ^(a)      199
Adjusted EBITDA                 16,134

(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 shuttle tankers;

• statements about KNOT’s and KNOT Offshore Partners’ ability to build and
retrofit 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 effects of a worldwide or regional economic slowdown;

• turmoil in the global financial markets;

• fluctuations in currencies and interest rates;

• general market conditions, including fluctuations in 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 charters,
which KNOT Offshore Partners defines as charters of five years or more;

• KNOT Offshore Partners’ ability to maximize the use of its vessels,
including the re-deployment or disposition of vessels no longer under
long-term charter;

• timely purchases and deliveries of newbuilds;

• future purchase prices of newbuilds and secondhand vessels;

• KNOT Offshore Partners’ ability to compete successfully for future
chartering and newbuild 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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