Market Overview

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

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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):

(U.S. Dollars in thousands)   Period repayment     Balloon repayment
Remainder of 2018 $ 41,362 $ 18,427
2019 71,903 284,678
2020 61,083
2021 61,683 70,811
2022 46,347 236,509
2023 and thereafter   62,341   161,901
Total $ 344,719 $ 772,326
 

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.
 
September 4, 2018
KNOT Offshore Partners L.P.
Aberdeen, United Kingdom
 
Questions should be directed to:
John Costain (+44 7496 170 620)
 
 
   

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Three Months Ended Six Months Ended
(U.S. Dollars in thousands)  

June 30,
2018

   

March 31,
2018

   

June 30,
2017

 

June 30,
2018

   

June 30,
2017

Time charter and bareboat revenues3 (1)

$ 69,221 $ 67,386 $ 51,537 $ 136,608 $ 95,284
Loss of hire insurance recoveries 450 2,276 450 3,426
Other income (2) 94 655 593 750 687
Total revenues 69,765 68,041 54,406 137,808 99,397
Vessel operating expenses 13,974 13,247 9,427 27,221 19,709
Depreciation 22,332 21,574 17,372 43,906 33,125
General and administrative expenses 1,350 1,345 1,493 2,695 2,962
Total operating expenses 37,656 36,166 28,292 73,822 55,796
Operating income 32,109 31,875 26,114 63,986 43,601
Finance income (expense):
Interest income 161 136 44 296 80
Interest expense (12,526) (10,594) (7,252) (23,119) (13,466)
Other finance expense (288) (337) (328) (626) (630)
Realized and unrealized gain (loss) on derivative instruments (3) 1,968 9,977 (1,536) 11,944 (1,017)
Net gain (loss) on foreign currency transactions 260 (330) (124) (70) (218)
Total finance expense (10,425) (1,148) (9,196) (11,575) (15,251)
Income before income taxes 21,684 30,727 16,918 52,411 28,350
Income tax benefit (expense) (3) (3) (3) (6) (6)
Net income 21,681 30,724 16,915 52,405 28,344
Weighted average units outstanding (in thousands of units):
Common units 32,694 32,694 29,694 32,694 29,694
General Partner units 615 615 559 615 559
 
(1)   Time charter revenues for the second quarter of 2018, the first
quarter of 2018 and the second quarter of 2017 include a non-cash
item of approximately $0.9 million, $1.2 million, and $0.8 million,
respectively, in reversal of contract liability and asset provision,
income recognition of prepaid charter hire and accrued income for
the Carmen Knutsen and for the Brasil Knutsen based on the average
charter rate for the fixed period.
(2) Other income is mainly related to guarantee income from Knutsen NYK.
Pursuant to the omnibus agreement, Knutsen NYK agreed to guarantee
the payments of the hire rate that is equal to or greater than the
hire rate payable under the initial charters of the Bodil Knutsen
and the Windsor Knutsen for a period of five years from the closing
date of the Partnership's initial public offering. In October 2015,
the Windsor Knutsen commenced operating under a new Shell time
charter. The hire rate for the new charter is below the initial
charter hire rate and the difference between the new hire rate and
the initial rate was paid by Knutsen NYK until April 15, 2018.
(3) Realized gains (losses) on derivative instruments relate to amounts
the Partnership actually received (paid) to settle derivative
instruments, and the unrealized gains (losses) on derivative
instruments related to changes in the fair value of such derivative
instruments, as detailed in the table below:
  Three Months Ended   Six Months Ended
(U.S. Dollars in thousands)

June 30,
2018

 

March 31,
2018

 

June 30,
2017

June 30,
2018

 

June 30,
2017

Realized gain (loss):
Interest rate swap contracts $ 57 $ (304) $ (938) $ (247) $ (1,607)
Foreign exchange forward contracts   134   1,105   (97) 1,239 (166)
Total realized gain (loss):   191   801   (1,035) 992 (1,773)
Unrealized gain (loss):
Interest rate swap contracts 2,995 8,946 (1,334) 11,942 (275)
Foreign exchange forward contracts   (1,218)   230   833 (990) 1,031
Total unrealized gain (loss):   1,777   9,176   (501) 10,952 756
Total realized and unrealized gain (loss) on derivative instruments: $ 1,968 $ 9,977 $ (1,536) $ 11,944 $ (1,017)
 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

               
(U.S. Dollars in thousands)

At June 30,
2018

At December 31,
2017

ASSETS
Current assets:
Cash and cash equivalents $ 45,085 $ 46,104
Amounts due from related parties 1,381 571
Inventories 2,495 2,241
Derivative assets 3,875 1,579
Other current assets   2,199   5,610
Total current assets   55,035   56,105
 
Long-term assets:
Vessels, net of accumulated depreciation 1,803,204 1,723,023
Intangible assets, net 2,195 2,497
Derivative assets 19,765 9,850
Accrued income   2,577   1,693
Total Long-term assets   1,827,741   1,737,063
Total assets $ 1,882,776 $ 1,793,168
 
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable $ 4,866 $ 5,224
Accrued expenses 6,860 6,504
Current portion of long-term debt 80,206 92,985
Current portion of derivative liabilities 261 978
Income taxes payable 18 175
Current portion of contract liabilities 1,518 1,518
Prepaid charter and deferred revenue 9,686 9,980
Amount due to related parties   1,766   5,450
Total current liabilities   105,181   122,814
 
Long-term liabilities:
Long-term debt 1,029,053 933,630
Derivative liabilities 164
Contract liabilities 5,963 6,722
Deferred tax liabilities   632   624
Total long-term liabilities   1,035,648   941,140
Total liabilities   1,140,829   1,063,954
Commitments and contingencies
Series A Convertible Preferred Units 89,264 89,264
Equity:
Partners' capital:
Common unitholders 640,969 628,471
General partner interest   11,714   11,479
Total partners' capital   652,683   639,950
Total liabilities and equity $ 1,882,776 $ 1,793,168
 

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
PARTNERS' CAPITAL

       
Accumulated
Other Series A
Comprehensive Total Partners' Convertible
Partners' Capital Income (Loss) Capital Preferred Units
Common   General Partner
(U.S. Dollars in thousands) Units Units      
Consolidated balance at December 31, 2016 $ 511,413 $ 10,297 $ $ 521,710 $
Net income 61,651 1,160 62,811 5,253
Other comprehensive income
Cash distributions (64,307) (1,210) (65,517) (3,453)
Net proceeds from issuance of common units 119,714 1,232 120,946
Net proceeds from sale of Series A Convertible Preferred Units           87,443
Consolidated balance at December 31, 2017 $ 628,471 $ 11,479 $ $ 639,950 $ 89,264
Net income 47,904 901 48,805 3,600
Other comprehensive income
Cash distributions (35,402) (666) (36,068) (3,600)
Net proceeds from issuance of common units   (4)       (4)  
Consolidated balance at June 30, 2018 $ 640,969 $ 11,714 $ $ 652,683 $ 89,264
 

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

     
Six Months Ended June 30,
(U.S. Dollars in thousands) 2018   2017
OPERATING ACTIVITIES
Net income $ 52,405 $ 28,344
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 43,906 33,125
Amortization of contract intangibles / liabilities (456) (632)
Amortization of deferred revenue (743) (743)
Amortization of deferred debt issuance cost 1,271 755
Drydocking expenditure (3,803) (3,800)
Income tax expense 6 6
Income taxes paid (172) (182)
Unrealized (gain) loss on derivative instruments (11,253) (757)
Unrealized (gain) loss on foreign currency transactions (44) (2)
Changes in operating assets and liabilities:
Decrease (increase) in amounts due from related parties (290) 38,590
Decrease (increase) in inventories 4 (216)
Decrease (increase) in other current assets 3,516 (1,914)
Decrease (increase) in accrued revenue (884) (300)
Increase (decrease) in trade accounts payable (1,222) 71
Increase (decrease) in accrued expenses (656) 826
Increase (decrease) prepaid revenue 449 360
Increase (decrease) in amounts due to related parties   (3,800)   4,490
Net cash provided by operating activities   78,234   98,021
 
INVESTING ACTIVITIES
Disposals (additions) to vessel and equipment (10) (180)
Acquisition of Tordis Knutsen (net of cash acquired) (32,374)
Acquisition of Vigdis Knutsen (net of cash acquired) (28,321)
Acquisition of Anna Knutsen (net of cash acquired)   (15,376)  
Net cash provided by (used in) investing activities   (15,386)   (60,875)
 
FINANCING ACTIVITIES
Proceeds from long-term debt 145,500 130,000
Repayment of long-term debt (146,002) (167,460)
Repayment of long-term debt from related parties (22,535) (70,663)
Payment of debt issuance cost (1,114) (1,140)
Cash distribution (39,668) (33,403)
Net proceeds from issuance of common units (4) 54,879
Net proceeds from sale of Convertible Preferred Units     87,443
Net cash provided by (used in) financing activities   (63,823)   (344)
Effect of exchange rate changes on cash (45) 35
Net increase in cash and cash equivalents (1,019) 36,837
Cash and cash equivalents at the beginning of the period   46,104   27,664
Cash and cash equivalents at the end of the period $ 45,085 $ 64,501
 

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, distributions on the Series A Convertible
Preferred Units, 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. The Partnership believes distributable
cash flow is an important measure of operating performance used by
management and investors in publicly-traded partnerships to compare cash
generating performance of the Partnership from period to period and to
compare the cash generating performance for specific periods to the cash
distributions (if any) that are expected to be paid to the common
unitholders, the Partnership's general partner and holder of the
incentive distribution rights. 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   Three Months
June 30, Ended March 31,
2018 2018
(U.S. Dollars in thousands)   (unaudited)   (unaudited)
Net income $ 21,681 $ 30,724
Add:
Depreciation 22,332 21,574
Other non-cash items; deferred costs amortization debt 697 574
Unrealized losses from interest rate derivatives and foreign
exchange currency contracts
Less:
Estimated maintenance and replacement capital expenditures
(including drydocking reserve)
(13,250) (12,776)
Distributions to Series A Convertible Preferred Units (1,800) (1,800)
Other non-cash items; deferred revenue (599) (600)
Other non-cash items; accrued income (295) (589)
Unrealized gains from interest rate derivatives and foreign exchange
currency contracts
(1,777) (9,176)
Distributable cash flow $ 26,989 $ 27,931
Distributions declared $ 18,034 $ 18,034
Distribution coverage ratio (1) 1.50 1.55

(1) Distribution coverage ratio is equal to distributable cash flow
divided by distributions declared for the period presented.

EBITDA and Adjusted EBITDA

EBITDA is defined as earnings before interest, depreciation and taxes.
Adjusted EBITDA refers to earnings before interest, depreciation, taxes,
goodwill impairment charges and other financial items (including other
finance expenses, realized and unrealized gain (loss) on derivative
instruments and net gain (loss) on foreign currency transactions).
EBITDA is used as a supplemental financial measure by management and
external users of financial statements, such as our lenders, to assess
our financial and operating performance and our compliance with the
financial covenants and restrictions contained in our financing
agreements. Adjusted EBITDA is used as a supplemental financial measure
by management and external users of financial statements, such as
investors, to assess our financial and operating performance. The
Partnership believes that EBITDA and Adjusted EBITDA assist 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 EBITDA and 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, as applicable, 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 EBITDA and Adjusted
EBITDA as financial measures 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. EBITDA
and Adjusted EBITDA are non-GAAP financial measures and should not be
considered as alternatives to net income or any other indicator of
Partnership performance calculated in accordance with GAAP.

The table below reconciles EBITDA and Adjusted EBITDA to net income, the
most directly comparable GAAP measure.

          Three Months Ended   Three Months Ended
June 30, March 31,
2018 2018
(USD in thousands) (unaudited) (unaudited)
Net income $ 21,681 $ 30,724
Interest income (161) (136)
Interest expense 12,526 10,594
Depreciation 22,332 21,574
Income tax expense 3 3
EBITDA 56,381 62,759
Other financial items (a) (1,940) (9,310)
Adjusted EBITDA 54,441 53,449

(a) Other financial items consist of other finance expense, realized and
unrealized gain (loss) on derivative instruments and net gain (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. Forward-looking statements include
statements with respect to, among other things:

  • market trends in the shuttle tanker or general tanker industries,
    including hire rates, factors affecting supply and demand, and
    opportunities for the profitable operations of shuttle tankers;
  • Knutsen NYK's and KNOT Offshore Partners' ability to build shuttle
    tankers and the timing of the delivery and acceptance of any such
    vessels by their respective charterers;
  • forecasts of KNOT Offshore Partners' ability to make or increase
    distributions on its common units and to make distributions on its
    Series A Convertible Preferred Units and the amount of any such
    distributions;
  • 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;
  • fluctuations in the price of oil;
  • 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;
  • 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 Knutsen NYK's
    relationships and reputation in the shipping industry;
  • KNOT Offshore Partners' ability to purchase vessels from Knutsen NYK
    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;
  • the financial condition of KNOT Offshore Partners' existing or future
    customers and their ability to fulfill their charter obligations;
  • timely purchases and deliveries of newbuilds;
  • future purchase prices of newbuilds and secondhand vessels;
  • any impairment of the value of KNOT Offshore Partners' 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 technical management agreements,
    the management and administration agreements and the administrative
    services agreement;
  • the anticipated taxation of KNOT Offshore Partners and distributions
    to its 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 U.S Securities
    and Exchange Commission, including its Annual Report on Form 20-F for
    the year ended December 31, 2017 and subsequent reports on Form 6-K.

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.

1 EBITDA, Adjusted EBITDA and distributable cash flow are
non-GAAP financial measures used by management and external users of the
Partnership's financial statements. Please see Appendix A for
definitions of EBITDA, Adjusted EBITDA and distributable cash flow and a
reconciliation to net income, the most directly comparable GAAP
financial measure.

2 Distribution coverage ratio is equal to distributable cash
flow divided by distributions declared for the period presented.

3 In May 2014, the Financial Accounting Standards Board (the
"FASB") issued accounting standards update ("ASU") 2014-09 " Revenue
from Contracts With Customers (Topic 606)
" and subsequent
amendments. The Partnership has adopted the new revenue standard on
January 1, 2018 and there is no impact on the adoption of this standard
on the Unaudited Consolidated Financial Statements.

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