ABERDEEN, Scotland--(BUSINESS WIRE)--Sep 4, 2018--

Highlights

For the three months ended June 30, 2018, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

Generated total revenues of $69.8 million, operating income of $32.1 million and net income of $21.7 million. Generated highest ever quarterly Adjusted EBITDA of $54.4 million. 1 Generated quarterly distributable cash flow of $27.0 million. 1 Reported a distribution coverage ratio of 1.50. 2 Fleet operated with 100% utilization for scheduled operations and 96.3% utilization taking into account the scheduled drydocking of the Brasil Knutsen, which was offhire for 53 days in the second quarter of 2018.

Other events:

On May 15, 2018, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended March 31, 2018 to all common unitholders of record on May 2, 2018. On May 15, 2018, the Partnership also paid a cash distribution to Series A Preferred unitholders with respect to the quarter ended March 31, 2018 in an aggregate amount equal to $1.8 million. On July 13, 2018, a subsidiary of Royal Dutch Shell (“Shell”) exercised its option to extend the time charter of the Windsor Knutsen by one additional year until October 2019. On August 3, 2018, the Partnership entered into amended time charter with Eni Trading & Shipping S.p.A. (“Eni”), extending the duration of the Hilda Knutsen time charter for four years and three one-year extension options. On August 14, 2018, the Partnership paid a cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2018 to all common unitholders of record on August 1, 2018. On August 14, 2018, the Partnership also paid a cash distribution to Series A Preferred unitholders with respect to the quarter ended June 30, 2018 in an aggregate amount equal to $1.8 million. On September 4, 2018, the Partnership entered into $375 million loan agreement to refinance the credit facility secured by the Windsor Knutsen, the Bodil Knutsen, the Fortaleza Knutsen, the Recife Knutsen, the Carmen Knutsen, and the Ingrid Knutsen

Financial Results Overview

Total revenues were $69.8 million for the three months ended June 30, 2018 (the “second quarter”) compared to $68.0 million for the three months ended March 31, 2018 (the “first quarter”). The increase in revenues was mainly due to full earnings from the Anna Knutsen, as the vessel was included in the results of operations from March 1, 2018, improved utilization on scheduled operations for the fleet in the second quarter, and one additional calendar day in the second quarter. The increase was partly offset by reduced revenues from the Brasil Knutsen as result of 53 offhire days incurred during the second quarter for the vessel’s scheduled first special survey drydocking.

Vessel operating expenses for the second quarter of 2018 were $14.0 million, an increase of $0.8 million from $13.2 million in the first quarter of 2018. The increase was mainly due to higher operating expenses due to the Anna Knutsen being included in the results of operations from March 1, 2018 and bunkers consumption in connection with the drydocking of the Brasil Knutsen that was charged in the second quarter. This was partially offset by the insurance claim in connection with the propeller repairs of the Carmen Knutsen.

General and administrative expenses were $1.4 million for the second quarter, compared to $1.3 million in the first quarter.

Depreciation was $22.3 million for the second quarter, an increase of $0.7 million from $21.6 million. The increase was mainly due to the Anna Knutsen being included in the results of operations from March 1, 2018.

As a result, operating income for the second quarter of 2018 was $32.1 million compared to $31.9 million in the first quarter of 2018.

Interest expense for the second quarter of 2018 was $12.5 million, an increase of $1.9 from $10.6 million for the first quarter of 2018. The increase was mainly due to the additional debt incurred in connection with the acquisition of the Anna Knutsen, higher LIBOR rate on average and increased leverage as a result of the refinancing of the Torill facility which took place in the first quarter of 2018 .

Realized and unrealized gain on derivative instruments was $2.0 million in the second quarter of 2018, compared to $10.0 million in the first quarter of 2018. The unrealized non-cash element of the mark-to-market gain was $1.8 million for the three months ended June 30, 2018 compared to $9.2 million for the three months ended March 31, 2018. Of the unrealized net gain for the second quarter of 2018, $3.0 million is related to mark-to-market gains on interest rate swaps and a loss of $1.2 million is related to foreign exchange contracts. Of the unrealized gain for the first quarter of 2018, $8.9 million is related to mark-to-market gains on interest rate swaps and an unrealized gain of $0.2 million is related to foreign exchange contracts. The unrealized gains in 2018 were as a result of an increase in the US swap rate.

As a result, net income for the second quarter of 2018 was $21.7 million compared to $30.7 million for the first quarter of 2018.

Net income for the second quarter of 2018 increased by $4.8 million from net income of $16.9 million for the three months ended June 30, 2017. The operating income for the second quarter of 2018 increased by $6.0 million compared to the second quarter of 2017, mainly due to increased earnings from the Vigdis Knutsen, the Lena Knutsen, the Brasil Knutsen and the Anna Knutsen being included in the Partnership’s results of operations from June 1, 2017, September 30, 2017, December 15, 2017 and March 1, 2018, respectively. Total finance expense for the three months ended June 30, 2018 increased by $1.2 million compared to the second quarter of 2017, mainly due to additional debt due to the acquisitions of the Vigdis Knutsen, the Lena Knutsen, the Brasil Knutsen and the Anna Knutsen, refinancing of the Hilda facility and the Torill facility, and higher LIBOR margin. This was partially offset by an increase in realized and unrealized gain on derivative instruments.

Distributable cash flow was $27.0 million for the second quarter of 2018 compared to $27.9 million for the first quarter of 2018. The decrease in distributable cash flow is mainly due to reduced earnings from the Brasil Knutsen as a result of its 53 days of offhire due to scheduled drydocking in the second quarter of 2018. This was partly offset by earnings from the Anna Knutsen being included in the Partnership’s results of operations from March 1, 2018. The distribution declared for the second quarter of 2018 was $0.52 per common unit, equivalent to an annualized distribution of $2.08.

Operational review

The Partnership’s vessels operated throughout the second quarter of 2018 with 100% utilization for scheduled operations and 96.3% utilization taking into account the scheduled drydocking of the Brasil Knutsen.

The Brasil Knutsen went offhire on March 29, 2018 for the mobilization trip to a shipyard in Portugal in order to complete her planned 5-year special survey drydocking. The Brasil Knutsen went back on charter on May 24, 2018 in Brazil.

On July 13, 2018, Shell exercised its option to extend the time charter of the Windsor Knutsen by one additional year until October 2019. Following the exercise of the option, Shell has four one-year options to extend the time charter.

On August 3, 2018, the Partnership entered into amended time charter with Eni, extending the duration of the Hilda Knutsen time charter for four years. Eni has three one-year options to extend the time charter.

Financing and Liquidity

As of June 30, 2018, the Partnership had $58.1 million in available liquidity, which consisted of cash and cash equivalents of $45.1 million and $13.0 million of capacity under its revolving credit facilities. The revolving credit facilities mature in June and August 2019. The Partnership’s total interest-bearing debt outstanding as of June 31, 2018 was $1,117.0 million ($1,109.3 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the quarter ended June 30, 2018 was approximately 2.1% over LIBOR.

As of June 30,2018, the Partnership had entered into foreign exchange forward contracts, selling a total notional amount of $25.0 million against the NOK at an average exchange rate of NOK 8.09 per 1.00 U.S. Dollar. These foreign exchange forward contracts are economic hedges for certain vessel operating expenses and general expenses in NOK.

As of June 30, 2018, the Partnership had entered into various interest rate swap agreements for a total notional amount of $539.5 million to hedge against the interest rate risks of its variable rate borrowings. As of June 30, 2018, the Partnership receives interest based on three or six month LIBOR and pays a weighted average interest rate of 1.82% under its interest rate swap agreements, which have an average maturity of approximately 5.4 years. The Partnership does not apply hedge accounting for derivative instruments, and its financial results are impacted by changes in the market value of such financial instruments.

As of June 30, 2018, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $493.0 million based on total interest bearing debt outstanding of $1,117.0 million, less interest rate swaps of $539.5 million, less a 3.85% fixed rate export credit loan of $39.4 million and less cash and cash equivalents of $45.1 million. The Partnership’s outstanding interest bearing debt of $1,117.0 million as of June 30, 2018 is repayable as follows (prior to giving effect to the refinancing described below):

Refinancing

On September 4, 2018 the Partnership’s subsidiaries which own the Windsor Knutsen, the Bodil Knutsen, the Fortaleza Knutsen, the Recife Knutsen, the Carmen Knutsen and the Ingrid Knutsen (“the Vessels”), entered into new senior secured credit facilities in order to refinance their existing long term bank debt. The senior secured credit facilities consist of a term loan of $320 million and a $55 million revolving credit facility. The term loan is repayable in 20 consecutive quarterly installments, with a balloon payment of $ 177 million due at maturity in September 2023. The term loan bears interest at a rate per annum equal to LIBOR plus a margin of 2.125%. The revolving credit facility will mature in August 2023, and bear interest at LIBOR plus a margin of 2.125%. There is a commitment fee of 0.85% payable on the undrawn portion of the revolving credit facility. The loans are guaranteed by the Partnership and secured by mortgages on the Vessels. The senior secured credit facilities will refinance the previously existing term loan of $320.0 million and $35 million revolver credit capacity secured by the Vessels which was due to mature between December 2018 and June 2019. Closing of the senior secured credit facilities is anticipated to occur in mid-September 2018.

Distributions

On August 14, 2018, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2018 to all common unitholders of record as of the close of business on August 1, 2018. On August 14, 2018, the Partnership also paid a cash distribution to Series A Preferred unitholders with respect to the quarter ended June 30, 2018 in an aggregate amount equal to $1.8 million.

Outlook

The Partnership’s earnings for the third quarter of 2018 will be affected by the planned 5-year special survey drydocking of the Hilda Knutsen and Torill Knutsen. Both vessels are operating in the North Sea and will undergo drydocking in Europe. Each vessel is expected to incur offhire of approximately 18-20 days. Offsetting this offhire will be the Brasil Knutsen, which is expected to operate for the entire third quarter after being offhire for 53 days in the second quarter due to its scheduled drydocking. The Ingrid Knutsen is due for its 5-year special survey drydocking in the fourth quarter of 2018 and is expected to incur offhire of approximately 18-20 days.

As of June 30, 2018, the Partnership’s fleet of sixteen vessels had an average remaining fixed contract duration of 4.1 years, after taking into account the contact extensions for the Hilda Knutsen and the Windsor Knutsen. In addition, the charterers of the Partnership’s time charter vessels have options to extend their charters by an additional 4.4 years on average.

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

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

The Board believes that demand for newbuild offshore shuttle tankers will continue to be driven over time based on the requirement to replace older tonnage in the North Sea and Brazil and further expansion into deep water offshore oil production areas such as in Pre-salt Brazil and the Barents Sea. The Board further believes that significant growth in demand exists and that this will continue for new shuttle tankers as the availability of existing vessels has reduced and modern operational demands have increased. Consequently, there should be opportunities to further grow the Partnership.

About KNOT Offshore Partners LP

KNOT Offshore Partners owns operates and acquires shuttle tankers under long-term charters in the offshore oil production regions of the North Sea and Brazil. KNOT Offshore Partners owns and operates a fleet of sixteen offshore shuttle tankers with an average age of 5.0 years.

KNOT Offshore Partners is structured as a publicly traded master limited partnership. KNOT Offshore Partners’ common units trade on the New York Stock Exchange under the symbol “KNOP.”

The Partnership plans to host a conference call on Wednesday, September 5, 2018 at noon (Eastern Time) to discuss the results for the second quarter of 2018, and invites all unitholders and interested parties to listen to the live conference call by choosing from the following options:

By dialing 1-855-209-8259 or 1-412-542-4105, if outside North America. By accessing the webcast, which will be available for the next seven days on the Partnership’s website: www.knotoffshorepartners.com.

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