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KNOT Offshore Partners LP: Earnings Release—Interim Results for the Period Ended September 30, 2018

November 26, 2018

ABERDEEN, Scotland--(BUSINESS WIRE)--Nov 26, 2018--

Highlights

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

Other events:

Financial Results Overview

Total revenues were $70.7 million for the three months ended September 30, 2018 (the “third quarter”) compared to $69.8 million for the three months ended June 30, 2018 (the “second quarter”). The increase in revenues was mainly due to full earnings from the BrasilKnutsen, as the vessel had finished its scheduled first special survey drydocking during the second quarter, and one additional calendar day in the third quarter. The increase was partly offset by reduced revenues from the Hilda Knutsen and Torill Knutsen due to the offhire periods for each of these vessels as a result of their scheduled first special survey drydockings, both of which commenced in the third quarter.

Vessel operating expenses for the third quarter of 2018 were $15.3 million, an increase of $1.3 million from $14.0 million in the second quarter of 2018. The increase was mainly due to the scheduled drydocking of the Hilda Knutsen and Torill Knutsen and one additional calendar day in the third quarter. In addition, the receipt of insurance proceeds in connection with the propeller repairs of the Carmen Knutsen in the second quarter of 2018 had reduced previous quarter costs. This was partially offset by reduced bunkers consumption in connection with the drydocking of the Brasil Knutsen that was charged in the second quarter and lower operating costs on average due to the strengthening of the U.S dollar against the Norwegian Kroner (NOK).

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

Depreciation was $22.4 million for the third quarter, an increase of $0.1 million from $22.3 million in the second quarter. The increase is mainly due to increased depreciation for the Brasil Knutsen, the Hilda Knutsen and the Torill Knutsen due to drydock additions.

As a result, operating income for the third quarter of 2018 was $31.7 million compared to $32.1 million in the second quarter of 2018.

Interest expense for the third quarter of 2018 was $13.5 million, an increase of $1.0 from $12.5 million for the second quarter of 2018. The increase was mainly due to increased amortization and extinguished debt issuance cost connected to the multi-vessels refinancing of the Carmen Knutsen, the Windsor Knutsen, the Bodil Knutsen, the Fortaleza Knutsen, the Recife Knutsen and the Ingrid Knutsen in the third quarter, a higher LIBOR rate on average and one additional day of interest in the third quarter compared to the second quarter of 2018.

Realized and unrealized gain on derivative instruments was $3.0 million in the third quarter of 2018, compared to $2.0 million in the second quarter of 2018. The unrealized non-cash element of the mark-to-market gain was $2.0 million for the three months ended September 30, 2018 compared to $1.8 million for the three months ended June 30, 2018. Of the unrealized net gain for the third quarter of 2018, $2.4 million is related to mark-to-market gains on interest rate swaps and a loss of $0.3 million is related to foreign exchange contracts. Of the unrealized gain for the second quarter of 2018, $3.0 million is related to mark-to-market gains on interest rate swaps and an unrealized loss of $1.2 million related to foreign exchange contracts. The unrealized gains in 2018 were due to an increase in the US swap rate.

As a result, net income for the third quarter of 2018 was $20.9 million compared to $21.7 million for the second quarter of 2018.

Net income for the third quarter of 2018 decreased by $0.2 million from net income of $21.1 million for the three months ended September 30, 2017 to a net income of $20.9 million for the three months ended September 30, 2018. The operating income for the third quarter of 2018 increased by $5.0 million compared to the third quarter of 2017, mainly due to increased earnings from the Lena Knutsen, the Brasil Knutsen and the Anna Knutsen being included in the Partnership’s results of operations from September 30, 2017, December 15, 2017 and March 1, 2018, respectively. Total finance expense for the three months ended September 30, 2018 increased by $5.2 million compared to finance expense for the three months ended September 30, 2017, mainly due to additional debt due to the acquisitions of the Lena Knutsen, the Brasil Knutsen and the Anna Knutsen, refinancing of the Hilda facility and the Torill facility and the multi-vessel refinancing of the Bodil Knutsen, the Windsor Knutsen, the Carmen Knutsen, the Fortaleza Knutsen, the Recife Knutsen and the Ingrid Knutsen, and higher LIBOR margin.

Distributable cash flow was $26.3 million for the third quarter of 2018 compared to $27.0 million for the second quarter of 2018. The decrease in distributable cash flow is mainly due to reduced earnings from the Hilda Knutsen and the Torill Knutsen as a result of off-hire due to their scheduled drydocking on the third quarter of 2018. This was partly offset by earnings from the Brasil Knutsen as a result of its scheduled drydocking in the second quarter of 2018. The distribution declared for the third 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 third quarter of 2018 with 99.9% utilization for scheduled operations and 97.4% utilization considering the scheduled drydocking of the Hilda Knutsen and the Torill Knutsen.

The Hilda Knutsen went offhire on July 25, 2018 for the mobilization trip to a shipyard in Denmark in order to complete her planned 5-year special survey drydocking. The Hilda Knutsen went back on charter on August 18, 2018.

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 an amended time charter with Eni, extending the duration of the Hilda Knutsen time charter for four years until August 2022. Eni has three one-year options to extend the time charter.

On September 5 , 2018, Eni, exercised its option to extend the time charter of the Torill Knutsen by one additional year until November 2019. Following the exercise of the option, Eni has four one-year options to extend the time charter.

The Torill Knutsen went offhire on September 17, 2018 for the mobilization trip to a shipyard in Denmark in order to complete her planned 5-year special survey drydocking. The Torill Knutsen went back on charter on October 5, 2018.

On November 9 , 2018, Equinor ASA exercised its option to extend the time charter of the Bodil Knutsen by one additional year until May 2020. Following the exercise of the option, Equinor has four one-year options to extend the time charter.

Financing and Liquidity

As of September 30, 2018, the Partnership had $78.7 million in available liquidity, which consisted of cash and cash equivalents of $56.0 million and $22.7 million of capacity under its revolving credit facilities. The revolving credit facilities mature in August 2019 and September 2023. The Partnership’s total interest-bearing debt outstanding as of September 30, 2018 was $1,116.6 million ($1,105.8 million net of debt issuance cost). The average margin paid on the Partnership’s outstanding debt during the quarter ended September 30, 2018 was approximately 2.1% over LIBOR.

As of September 30,2018, the Partnership had entered into foreign exchange forward contracts, selling a total notional amount of $30.0 million against the NOK at an average exchange rate of NOK 8.05 per 1.00 U.S. Dollar and selling a total notional amount of NOK 40.7 million against the USD at an exchange rate of NOK 8.14 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 September 30, 2018, the Partnership had entered into various interest rate swap agreements for a total notional amount of $536.4 million to hedge against the interest rate risks of its variable rate borrowings. As of September 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 5.2 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 September 30, 2018, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $524.2 million based on total interest bearing debt outstanding of $1,116.6 million, less interest rate swaps of $536.4 million and less cash and cash equivalents of $56.0 million. The Partnership’s outstanding interest bearing debt of $1,116.6 million as of September 30, 2018 is repayable as follows:

Refinancing

On September 20, 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”), refinanced their existing bank debt, entering new long-term senior secured credit facilities. The new 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 September 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 refinanced a previously existing term loan of $320 million and $35 million of revolver credit which were due to mature between December 2018 and June 2019.

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 the Series A Preferred unitholders with respect to the quarter ended June 30, 2018 in an aggregate amount equal to $1.8 million.

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

Annual Meeting

On September 4, 2018, the Partnership held its annual meeting of limited partners at which Edward A. Waryas was elected as a Class I director of the Partnership whose term will expire at the 2022 annual meeting of limited partners.

Outlook

The Partnership’s earnings for the fourth quarter of 2018 will be affected by the completion of the planned 5-year special survey drydockings of both the Torill Knutsen and the Ingrid Knutsen. The Torill Knutsen was back on charter on October 5, 2018 after finalizing her first special survey and incurring approximately 18 days of offhire in total. The Ingrid Knutsen went offhire on November 1, 2018 in order to complete her planned 5-year special survey drydocking and was back on charter on November 22, 2018, incurring approximately 21 days of offhire.

Offsetting the impact of this offhire will be the Hilda Knutsen, which is expected to operate for the entire fourth quarter after being offhire for 24 days in the third quarter due to its scheduled drydocking.

As of September 30, 2018, the Partnership’s fleet of sixteen vessels had an average remaining fixed contract duration of 3.9 years. 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.

On September 26, 2018, Knutsen NYK Offshore Tankers AS, the owner of the Partnership’s general partner (“Knusten NYK”), entered into new long term charters with Equinor ASA for two Suezmax DP2 shuttle tanker newbuildings to be constructed by Hyundai Heavy Industries in South Korea with delivery scheduled in the second half of 2020.

Pursuant to the omnibus agreement the Partnership entered into with 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 5.2 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 Tuesday, November 27, 2018 at noon (Eastern Time) to discuss the results for the third quarter of 2018, and invites all unitholders and interested parties to listen to the live conference call by choosing from the following options:

November 26, 2018 KNOT Offshore Partners L.P. Aberdeen, United Kingdom

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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