KNOT Offshore Partners LP Earnings Release – Interim Results for the Quarter Ended June 30, 2015

ABERDEEN, Scotland--(BUSINESS WIRE)--Highlights

For the three months ended June 30, 2015, KNOT Offshore Partners LP (“KNOT Offshore Partners” or the “Partnership”):

In addition, the Partnership:

Financial Results Overview

Total revenues were $37.0 million for the three months ended June 30, 2015 (the “second quarter”) compared to $36.2 million for the three months ended March 31, 2015 (the “first quarter”). The increase was primarily due to the Dan Sabia being included in the Partnership’s results of operations from June 15, 2015 and an additional day in the second quarter, as well as fleet utilization of 100% in the second quarter compared to 99.9% in the first quarter.

Due to a significant reduction in the price of the Partnership’s common units during the past few months, for accounting purposes, the Partnership recorded a non-cash impairment charge of $6.2 million in the second quarter of 2015. The impairment charge relates mainly to capitalized goodwill which arose in 2008 when the Partnership’s predecessor acquired the Windsor Knutsen and three other vessels then under construction, in a transaction that was then accounted for as a step transaction. This non-cash charge, which does not affect the Partnership’s operations, cash flows, liquidity, or any of its loan covenants, reduces the Partnership’s remaining goodwill balance to zero as of June 30, 2015.

Operating income for the three months ended June 30, 2015 was $11.1 million compared to $17.0 million for the three months ended March 31, 2015. The increase was largely due to the factors described above.

Net income for the three months ended June 30, 2015 was $6.9 million compared to $7.2 million for the three months ended March 31, 2015. Net income was impacted by the recognition of realized and unrealized gain on derivative instruments of $0.3 million in the three months ended June 30, 2015 as compared to a loss of $5.6 million for the three months ended March 31, 2015 as a result of increase in long term interest rates and the strengthening of the Norwegian Kroner against the dollar in the second quarter. The unrealized non-cash element of these amounts is a $1.6 million gain for the three months ended June 30, 2015 and a $4.6 million loss for the three months ended March 31, 2015.

All nine of the Partnership’s vessels operated well throughout the second quarter of 2015. All the vessels achieved 100.0% utilization (no days off hire).

Distributable cash flow was $16.2 million for the three months ended June 30, 2015, compared to $16.4 million for the three months ended March 31, 2015. Because the second quarter distribution was payable on all outstanding common units at the record date, the coverage ratio for the three months ended June 30, 2015 was negatively impacted by the increase in common units outstanding following the June 2015 offering.

The quarterly cash distribution for the three months ended June 30, 2015 is $0.51 per unit, equivalent to an annual distribution of $2.04, representing a 36% increase from the minimum quarterly distribution set at the Partnership’s initial public offering (“IPO”). Subsequent to the acquisition of the Dan Sabia, management has recommended to the Board of Directors of the Partnership (the “Board”) an increase in the quarterly cash distribution with respect to the quarter ended September 30, 2015 of between $0.01 and $0.015 per unit. This corresponds to an annual increase of between $0.04 and $0.06 per unit, or approximately 2.0% to 3.0% per unit, to an annualized distribution of between $2.08 and $ 2.10 per unit. Any such increase would be conditioned on, among other things, approval of such increase by the Board and the absence of any material adverse developments or potentially attractive opportunities that would make such an increase inadvisable.

Financing and Liquidity

As of June 30, 2015, the Partnership had cash and cash equivalents of $71.4 million and undrawn revolving credit facility of $20 million. Total interest bearing debt outstanding was $618.8 million. The average interest rate paid on the Partnership’s outstanding debt during the quarter ended June 30, 2015 was approximately 2.3% over LIBOR.

As of June 30, 2015, the Partnership had entered into various interest rate swap agreements for a total notional amount of $412.3 million to hedge against the interest rate risks of its variable rate borrowings. The Partnership does not apply hedge accounting for derivative instruments. Under the terms of the interest rate swap agreements, the Partnership receives interest based on three or six month LIBOR and pays a weighted average interest rate of 1.55%.

As of June 30, 2015, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $135.1 million based on total net interest-bearing bank debt of $618.8 million, less the interest rate swaps of $412.3 million and less cash and cash equivalents of $71.4 million.

The Partnership’s outstanding interest bearing debt of $618.8 million as of June 30, 2015 is repayable as follows:

Follow-on Equity Offering

On June 2, 2015, the Partnership sold 5,000,000 common units in an underwritten public offering (the “June 2015 offering”). In connection with the June 2015 offering, the General Partner contributed a total of $2.4 million in order to maintain its 2% general partner interest in the Partnership. The Partnership’s total net proceeds from the June 2015 offering and the General Partner’s contribution were $116.6 million. The Partnership used the net proceeds to fund the cash portion of the purchase price of the Dan Sabia and to repay its $20 million revolving credit facility, the seller’s credit of $12.0 million provided by Knutsen NYK Offshore Tankers AS (“Knutsen NYK”) in connection with the acquisition of the Dan Cisne and $7.5 million of the credit facility related to the Dan Sabia as described below. The remainder of the net proceeds is available for general partnership purposes.

Acquisition of Dan Sabia

On June 15, 2015, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT Shuttle Tankers 21 AS (“KNOT 21”), the company that owns and operates the shuttle tanker Dan Sabia, from Knutsen NYK for a purchase price of $103.0 million less approximately $64.5 million of existing bank debt (the “Dan Sabia Loan”) and other purchase price adjustments of $2.7 million. KNOT 21 prepaid $7.5 million of the Dan Sabia Loan at closing. The remaining $57.0 million is repayable in semi-annual installments over nine years, and a balloon payment of $6.5 million is due in January 2024. The Dan Sabia Loan bears interest at an annual rate equal to LIBOR plus a margin of 2.4%.

Windsor Knutsen Charter Amendment

In April 2014, BG Group Plc (“BG”) notified the Partnership that it would not exercise its option to extend the Windsor Knutsen time charter after the expiration of its initial term. In July 2014, the vessel was re-delivered. In June 2014, the Partnership entered into a new two-year time charter contract, which was subsequently amended in June 2015 (the “June 2015 Amendment”), with BG for the Windsor Knutsen that will commence in the fourth quarter of 2015. The June 2015 Amendment provides that BG will have three more one-year extension options, in addition to its existing three one-year extension options (a total of six one-year extension options), and it reduces the time charter rate for the initial term of the charter by 3.4%. As a result of the June 2015 Amendment, the Partnership estimates that the next dry-docking of the Windsor Knutsen will take place in the first half of 2017, instead of the previously estimated August or September of 2015. Knutsen NYK’s agreement to compensate the Partnership for any difference between the original time charter rate and the new time charter rate pursuant to the omnibus agreement entered into with Knutsen NYK in connection with the IPO (the “omnibus agreement”) will remain in effect until April 2018.

2015 Annual Meeting

On August 12, 2015, the Partnership held its annual meeting of limited partners and Andrew Beveridge was re-elected to the Board of Directors of the Partnership for a term that will expire at the 2019 annual meeting of limited partners.

Outlook

As of June 30, 2015, the Partnership’s current fleet of nine vessels has an average remaining fixed contract duration of 5.2 years. In addition, the charterers of our time charter vessels have options to extend their charters by an additional 2.2 years on average.

The Partnership has or expects to receive options to acquire six vessels controlled by Knutsen NYK pursuant to the terms of the omnibus agreement. Two of these vessels are currently operating under long-term charters, and four are under construction in South Korea and China. As of June 30, 2015, the average remaining fixed contract time for these vessels is 6.4 years. In addition, the charterers have options to extend these charters by 10.2 years on average.

Under the omnibus agreement, the Partnership has the option to purchase the Ingrid Knutsen and the Raquel Knutsen from Knutsen NYK within 24 months of their delivery to charterers. Delivered to a subsidiary of ExxonMobil in February 2014, the Ingrid Knutsen is operating under a time charter that expires in 2024, with charterer’s options to extend until 2029. The Raquel Knutsen, delivered in 2015, is chartered to Repsol Sinopec Brazil BV under a time charter that expires in 2025, with charterer’s options to extend until 2030.

In January 2015, Knutsen NYK announced an agreement for a long-term time charter with an international oil company of a new DP2 Suezmax shuttle tanker with delivery in the first quarter of 2017. The vessel has been ordered at Cosco Zhoushan shipyard in China and will be a sister vessel of the Raquel Knutsen. The shuttle tanker is expected to operate in Brazil. Pursuant to the omnibus agreement, the Partnership will have the option to acquire this vessel from Knutsen NYK following acceptance by the charterer of the vessel.

In connection with the September 12, 2014 contract between Knutsen NYK and a subsidiary of BG for two Suezmax-size DP2 shuttle tanker newbuildings, BG received an option, for a period of one year, to contract up to two more shuttle tanker newbuildings. In June 2015, BG exercised its option for an additional vessel, and Knutsen NYK entered into a new long-term charter with a subsidiary of BG to provide shuttle tanker services in Brazil beginning in mid-2017. This charter will have a minimum term of 5 years, with options for BG to extend for an additional 15 years. BG has a remaining option to contract one additional shuttle tanker. These newbuildings are all under construction at Hyundai Heavy Industries in South Korea. The Partnership will have the option to acquire each of these vessels from Knutsen NYK pursuant to the omnibus agreement following acceptance by BG of each such vessel.

Pursuant to the omnibus agreement, the Partnership also 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 vessels from Knutsen NYK.

The Board believes that there will be opportunities for growth for the Partnership beyond the current identified acquisition candidates, and the demand for offshore shuttle tankers will continue to grow over time based on identified projects. Future oil price developments will influence the growth of offshore oil production activity when existing projects are completed.

The Board is pleased with the development of new business opportunities and the results of operations of the Partnership for the quarter ended June 30, 2015, and is confident that the Partnership remains 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 nine offshore shuttle tankers with an average age of 3.8 years operating under long-term charters.

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 Thursday, August 13, 2015 at noon (Eastern Time) to discuss the results for the second quarter of 2015. All unitholders and interested parties are invited to listen to the live conference call by choosing from the following options:

August 12, 2015
KNOT Offshore Partners L.P.
Aberdeen, United Kingdom

Questions should be directed to:
John Costain (+44 7496 170 620)

APPENDIX A – RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Distributable Cash Flow (“DCF”)

Distributable cash flow represents net income adjusted for depreciation, unrealized gains and losses from derivatives, unrealized foreign exchange gains and losses, goodwill impairment charges, 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 the Partnership’s 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.

Adjusted EBITDA

Adjusted EBITDA refers to earnings before interest, other financial items, taxes, goodwill impairment charges and depreciation. Adjusted EBITDA is a non-GAAP financial measure used by investors to measure the Partnership’s 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, goodwill impairment charges and depreciation, 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.

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. Forward-looking statements include statements with respect to, among other things:

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.