John Costain - Chief Executive Officer and Chief Financial Officer Øystein Kalleklev - Chairman

Spiro Dounis - UBS Securities Hillary Cacanando - Wells Fargo Ben Brownlow - Raymond James Nick Raza - Citi

Good day everyone. And welcome to the KNOT Offshore Partners LP First Quarter Conference Call. All participants will be in a listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. John Costain. Sir, please go ahead.

Thank you. If any of you have not seen the earnings release or the slide presentation, they’re both available on the Investors section of our Web site. On today’s call, our review will include non-U.S. GAAP measures such as discounted cash flow, DCF and adjusted EBITDA. The earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. A quick reminder that any forward-looking statements made during today’s call are subject to risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from those forward looking statements. The Partnership does not undertake a duty to update any forward looking statements, and now onto the presentation. KNOT Offshore Partners, KNOP, focuses on the Shuttle Tanker segment. These assets provide a vital service transporting oil from offshore oil production units to shore side. In essence, a midstream mobile pipeline business. The vessels are an integral part of the logistic supply chain operating in a space which will see substantial oil production growth in the coming years. Shuttle Tankers are built to charters requirements and used on specific fields. They attract contracts which give long-term non-volume based revenue streams. Whilst the MLP has a young fleet, our sponsors been involved in design and construction of these type of vessels for over 30 years, building up the fleets organically during this period. And today the Knutsen Group has more than of these high specification tankers. And on these sectors, there has been no speculative oil drill, so the partnership should yield both stable and sustainable revenues longer-term, before ordering a new vessel of sponsored Knutsen NYK has always agreed a long-term employment contract with the charter. Following on from the recent acquisition of Recife Knutsen in Q4 2016 and Tordis in Q1 2017, we are pleased to announce another addition to MLP fleet, the big Knutsen for an acquisition price of $147 million. This will occur in June 2017. The vessel was delivered in February 2017 and commenced a five year charter to Royal Dutch Shell in April 2017. As well as being an accretive acquisition, the vessel have time charter duration of five-years plus 10-30 years of options, increasing our MLP charter backlog and reducing the age of the fleet. KNOP trades at significant yield premium to Alerian today. Our distribution is over 9% compared to Alerian Index of around 7%. The index represents around 85% off all MLPs by market cap. Our sponsored Knutsen NYK is according to Clarkson Platou research part of the largest shipping group in the world, and NYK is a major company in the Mitsubishi family. At the end of the second quarter of 2013, just after to the IPO, we’ve had a fleet of four vessels with an average age of three and a quarter years. In the space of four short years, the fleet would have grown 225% in 13 vessels with an average age of about four and a quarter years at the end of June. Despite disruption in the capital markets, we continue to grow at a rate significantly in excess of most MLPs. Now turning to presentation, slide three; highlights of an eventful first quarter. The Partnership generated record total revenues of $45 million; operating income of $17.5 million and net income of $11.4 million; generated adjusted EBITDA of $33.2 million and distributable cash flow of $15.6. The fleets operated with 98.6% utilization for scheduled operations, including insurance proceeds, which accounted for 2.5% and 93.2% utilization taken into account all by including the planned dry dock of the Windsor Knutsen, which was completed in 54.1 days. On the 10th of January 2017, the Partnership sold 2.5 million common units in the public offering, raising total net proceeds of $54.9 million. On the 2nd of February 2017, the Partnership issued and sold a private placement convertible preferred unit to $50 million U.S. On the 1st of March 2017, the Partnership completed the acquisition of the entity that owns the Tordis Knutsen. On March 30, 2017, the Partnership entered into a loan agreement for a refinancing of the credit facilities secured by the Hilda Knutsen. May 15, 2017 the Partnership paid the cash distribution of $0.52 per common units with respect to Q1. With the distributable cash flow of $16.6 million, we made a record $17 million distribution payment with the recently issued common and preferred units included. Since our initial IPO over four years ago, we have now declared and paid common unit distributions of $7.7 so our initial investors have received a total return of 37%. Our current yield has a stable distribution of over 9%. On May 16, 2017, the Partnership entered into a share purchase agreement with a Company that owns the shuttle tanker, Vigdis Knutsen from Knutsen NYK Offshore Tankers, Knutsen NYK. Slide 4, raising additional $40 million of preferred equity to fund further growth in the Partnership. As we said previously on February 2, 2017, the Partnership issued and sold a private placement of 2.08 Series A Convertible Preferred Units -- Series A Preferred Units, at a unit price of $24 per unit; a private placement of $50 million, the net proceeds from the sale after expenses was about $48.6 million. On May of 16th, we reached an agreement for a third private placement to sell an additional 1.667 million Series A units. This is expected to close by 30th of June 2017 with net sale proceeds of around $38.8 million. Subscribers of the instruments are large international firms located in three different continents. The $40 million allows the Partnership to consider an additional dropdown in the second half of 2017 on top of the two dropdowns, which have already been announced. This is one additional vessel compared to our financial guidance at Investor Day. And although it makes our balance sheet a bit more complex, the preference issue enables us to raise equity at running cost of 8% so allowing KNOP to continue to grow through accretive acquisitions. There're no preemptive rights which are quite common in such agreements to the detriments of the issuer. The issue is evidenced that KNOP is proactive in finding other sources of capital accretive to them when constrained by the equity markets. The private preferred potential convertible equity instrument, as I said previous, carries a fixed coupon of 8%, which is not -- but this is not subject to adjustments and is convertible to common equity after two years and adjustable strike price is just being dependent upon the developments of the book value of the Partnership. The original strike price is at a level of $24. Slide five, the income statement. Total revenues were $45 million for the three months ended March 31, 2017 Q1 compared to $45 million for the three months ended December 31st Q4. Q1 revenues were positively affected by the time charter earnings of Raquel Knutsen and Tordis Knutsen being included with the results of operations from December 01, 2016 and March 01, 2017 respectively. The increase was offset by reduced revenues from Windsor Knutsen as a result of a scheduled drydocking during the third quarter. This was completed in 54 days. In addition due to a technical fault with its controllable pitch propeller, the Raquel Knutsen went offhire during the third quarter, which resulted in a loss of hire insurance claim. The 14 day deductible for offhire under the rated insurance policy also adversely affected revenues during the third quarter. We ensure all our fleets full of supply, this helps maintain the stability and predictability of our KNOP earnings. When an event occurred, which causes up higher switches with the Raquel Knutsen, revenue lost during scheduled offhire is minimized. In four years of operations, this is the first loss of hire claim we have made. Vessel operating expenses for the first quarter of 2017 were $10.3 million, an increase of $2.6 million from the fourth quarter of 2016. The increase was mainly due to Raquel Knutsen and Tordis Knutsen being included in the fleet commencing 1st December and 1st of March, respectively. In the vessel operating expenses for the first quarter, $0.6 million related to bunkers consumption in connection with the drydocking of Windsor Knutsen, and $0.6 million is related to the repair of Raquel Knutsen, which is expected to be recovered by the insurance less a deductible of $150,000. General and administrative expenses were increased $0.3 million from the fourth quarter 2016 to $1.5 million. The increase primarily reflects the effects of additional activity in connection with the year-end accounts. As a result, operating into the first quarter 2017 was $17.5 million compared to $20.6 million in the fourth quarter of 2016. Interest expense for Q1 was $6.2 million compared to $5.7 million for Q4. The increase mainly due to additional debt incurred with the acquisition of both Windsor -- the Raquel and Tordis Knutsen. Realized and unrealized gain on derivative instruments was $0.5 million in Q1 compared to $4 million in Q4. The unrealized non-cash element of the mark-to-market gain was $1.3 million compared to $4.5 million in Q4. Of the unrealized gain in Q1, there was $1.1 million related to market. Mark-to-market gains on the interest rates swaps due to an increase in the interest rate swap rate during the quarter, and unrealized gain of $0.2 million related to foreign currency contracts due to slightly stronger U.S. dollar against Norwegian Krone. As a result, net income for Q1 was $11.4 million compared to $19.5 million for Q4. Slide Six, adjusted EBITDA. Adjusted EBITDA reflects the earnings before interest, taxation, depreciation and amortization. It provides a proxy for cash flow. Adjusted EBITDA of course is a non U.S. GAAP measure used by our investors to measure the partnership performance. In general, since the formation of KNOP, we had a very high level of vessel utilization on average around 99.5% for scheduled operations. Financially, this translates into continually high and increasing predictable revenue and adjusted EBITDA as more vessels are added to the fleet. This will continue and be more pronounced from Q2 when Windsor, Raquel and Tordis all should trade for full quarter and Vigdis will be added to the fleet. In Q1, the Partnership generated adjusted EBITDA of $33.2 million compared to $36.1 million in Q4. The EBITDA fell by $2.9 million compared to Q4. This was impacted by the fault occurred. G&A and OpEx were more expensive by $450,000. We also had an increase in OpEx mostly due to Windsor bunkers consumed bouncing to drydock of $600,000. There were two less days in Q1; Q1, I think is generally poorer than the rest of the year. This affects the Partnership by $800,000; the Windsor drydocking accounts for 51 days of off fired, that’s $3.1 million; the Raquel 14 days loss of higher access was $700,000; Raquel whole machinery docked about further $150,000 and the timing difference on the Raquel outstanding whole machinery payments of further $500,000; this had a negative impact of $6.3 million on the EBITDA. Capturing this with the Raquel full quarter income compared to one quarter in Q4 -- one month in Q4, this had an impact positive of $2 million and the Tordis was at March added $1.4 million to EBITDA; so overall, $6.3 million minus $3.4 million gives you $2.9 million. At the end of Q1, the KNOT fleet of 12 vessels has an average age of 4.6 years compared to the rest of the industry average for shell tankers, excluding KNOT of around 12 years. With a wasting asset like a vessel, the younger fleets in theory should produce lower EBITDAs to every dollar invested. The annuity effect reduces the value lost in the earlier years, which is factored into replacement CapEx calculation for the distributable cash flow. Slide seven, on the Windsor Knutsen special survey, which went according to plan. The Windsor went through a special second survey, which is the 10 year one in drydocking at Brest shipyard in France. CapEx and OpEx were in line with budget and the docking was completed on schedule. Off-hire in relation to the special survey was completed in 54.1 days, because the vessel undertook lengthy ballast legs from Brazil to France back. The Vessel was back on-hire under a Shell time charter from April 4th. Slide eight, we have a comprehensive insurance package for all our vessels. In the first quarter, our fleet operated with 96% utilization for scheduled operations. Of the 4% on schedule offhire, 3.9% related to the Windsor -- Raquel Knutsen and technical fault. We ensure our fleet for loss offhire to minimize the impact on MLP earnings when an event occurs, which causes off-hire consequently 2.5% of this time from 4% loss is recoverable under our insurance policies. In four years of operation, this was the first loss offhire claim we had made. The insurances have helped smooth and stabilize our fleet earnings. In order to mitigate the economic costs of any incident, which can result in damage and/or offhire, the Partnership has put in place a comprehensive insurance package with a diverse group of investment-grade insurance companies. The large majority of which are rated A-or better by S&P and A.M. Best Company. The failure of the controllable pitch propeller, CPP of Raquel Knutsen was resulting offhire in relation to repair and ballast is therefore expected to result in a economic loss in total of $0.85 million for the Partnership, $0.7 million in loss offhire and $0.15 million in hull and machinery excess. Insurance recoveries are accounted for when they are payable of these fleets. In our case, the confirmation of payment from the insurer has been used we are still occurring cost and building the claim. So inevitably there are timing differences and at this stage, the insurance company cannot confirm they will recover all losses less the deductible of $150,000. These timing differences adversely affect the first quarter results by further $570,000. The sponsor and by extension the Partnership has good experience and the history that indicates the insurance company will pay the amount close to the total cost. Bareboat charterers undertake to fully insure the vessel they leased from us at their own costs in order to protect those from any economic loss. Our time charter vessels generally have the following policies; hull and machinery covers a loss of or damage to the vessel due to marine perils, such as collisions, grounding and the weather; protection and indemnity indemnifies against liabilities incurred while the Vessel, including injuries to the crew and third parties, cargo loss, property damage and pollution; or risk covers loss of damage to the vessel due to perils, including total loss and damage collision liability and hull interest and freight interest; loss of hire in excess of 14 days and up to 180 days per incident. Slide nine, distributable cash flow. The non-U.S. gap measure to estimate distribution sustainability. Today, we reported the quarterly distributable cash flow of $15.6 million in Q1. This compares to our highest ever 2 and 28 in Q4. We maintain our distribution levels for Q1 of $0.52 tons per unit equivalent to an annual distribution of $2.08. The distribution coverage ratio for this quarter is 0.95. The coverage ratio has reduced primarily due to the equity being raised before assets are dropped into the MLP effectively what we call an equity overhang. The common unit we have $54.9 million in January and the preference unit, $48.6 million in February issues, were made in the first quarter. The preference unit of $38.8 million will be in the second quarter and used to finance -- help to finance the Tordis from February 01st and on early June. The outlook for the second quarter is considerably better. There are no offhires and should be no offhires any of the vessels in this quarter, the Raquel the Windsor, the Tordis will all be on hire for the full quarter. And the Vigdis Knutsen will enter the feet towards the end of the quarter. The MLP has an elevated deal compared to most MLPs. And therefore, we have rather focused on firstly building coverage and then deleveraging rather increasing dividend as there is little benefit to the MLP shorter term payment yield of much over 9%. We have raised funds of between $21 and $29 per unit, and many of our common unit holders have remained loyal so we would not want to dilute it. We see double digit distributions as a signal our investors would draw the preferred increase coverage through investments and secondly deleveraging rather than increasing dividends. That said, we had a coverage ratio of 0.95% in Q1 even with both the equity overhang and vessel offhires. And potentially there is room for increase in the distribution, but this is something the Board of Directors has to consider. Next slide, the balance sheet. At the end of Q1, we had solid liquidity position with cash and cash equivalents of $34.9 million and an ongoing undrawn credit facility of around $30 million; the credit facilities available are for June '19. Following on from both preference and common issuance as we acquire the Tordis Knutsen and repaid the seller credit and most the revolving credit facility has been fully repaid. Our treasury position is therefore very comfortable, and with additional preference to issue $40 million, the Hilda refinancing proceeds around $24 million, the potential uses of revolver facility $30 million and the seller credit of $25 million, these hopefully can be utilized to acquire further vessel in addition to Vigdis before the end of 2017 to further build the MLP. We have a predictable cash flow and we do not have any low maturity to both second half of 2018. This will soon be materially improved with the refinancing of Hilda, our first balloon repayment due. The total interest-bearing debt outstanding was $781 million. This has increased due to the acquisition of Raquel Knutsen. And we currently have scheduled repayments to $59.9 million. This compares to replacement and maintenance CapEx charge of around $32 million. And when completing distributable cash flow, this accounts for the current cover generated. Slide 11, pending the Vigdis dropdown. We announced latest addition to MLP fleet, the Vigdis Knutsen, for an acquisition price of $147 million, effective from June 2017. Built by Hyundai Heavy Industries in Korea and delivered in February 2017, the Vigdis is sister to the Tordis Knutsen. It is a Suezmax class enhanced DP2 shuttle tanker operating under a time charter that expires in the second quarter of 2022 with Royal Dutch Shell in Brazil. There are options to extend until 2032. We have agreed with a response to Knutsen NYK to acquire the vessel for the MLP for $147 million with delivery effective from June 2017. It will be part financed by commercial debt of around $95 million and also cash from the new equity. The senior loan has margin of 190 basis points with annual repayments of under $5.1 million. The net charter rate will yield around $7.7 million and net income with approximately $16.2 million of EBITDA for the first year from 2017 June. The charter has an escalator of around $600 per day applicable annually, that’s $0.2 million on the EBITDAs. With this acquisition, it again demonstrates our sponsor’s strong support of and commitments to the MLP. Our fleet will have grown 225% since the IPO in April 2013. Next slide, our contracts are fixed price not fixed for the price of oil. The extreme movement of the Alerian Index and to a larger extent and not in a price due to market volatility, which we saw in 2015 and 2016 have receded. And with them the oil price coalition to our unit price that had occurred has also become less pronounced. Throughout this period, the volatility in unit price in no way reflected or affected the underlying performance of the MLP. All our contracts are long-term non-volume based with a fixed price; therefore, our vessels all achieve a fixed income per day. These contracts are all with the end user of the assets, which is an integral part of the logistic supply chain and without these assets the oil will not flow. Next slide, stable and long-term sustainable distribution policy. Since our initial IPO offering four years ago an uphill unit yield has remained elevated therein for most of that period. The unit has price that significantly outperform the Alerian and with the high yield, this has produced a stable investment and the significant ownership premium. During this period, our investment distribution has increased by 49%. Our average distribution coverage ratio has been around 1.18 times. And through leveraging we have been able to cloud much of this back into the MLP to enhance the growth. Q1 is primarily affected by equity overhang as there was a delay in investing proceeds from equity offerings. Commercially, we have also have been affected by the scheduled drydocking at Windsor and Raquel offhire. The impact of the Raquel offhire we expect to reduce as the full claim is negotiated. In calculating the DCF in Q1 2017, the coupon on the preferred equity has been deducted before the available DCF is completed as is purely a common unit distribution sustainability measure. The Hilda refinancing marks the start of refinancing activity. On the March 30, 2017, the Partnership completed a refinancing of the Hilda Knutsen . The new senior secured credit facility consists of $100 million term loan with Mitsubishi, and this has a fixed tenure of seven years. Closing the facility is anticipated towards the end of May 2017. The Hilda refinancing will remove an ex-balloon repayment due and this was in August 2018. At the same time, we will raise an additional $24 million and reduce the loan margin by 30 basis points, the cost for the facility is 1%. The facility is repayable in 28 consecutive quarterly installments with the balloon payment of $58.5 million at maturity. The facility will bear interest rate per annum equal to LIBOR plus the margin of 2.2%. The next balloon payment is just to shift following October 2018, as we roll through these refinance, we should be able to use additional funding to raise further growing the investment base. Lumpsum contracts backed by leading energy companies, our fleets have an average mainly contract duration of 4.8 years with an additional 3.6 years coverage on average in charters option. The Windsor Knutsen had been on a two year contract from October 2015 with Brazil Shipping, a subsidiary of Royal Dutch Shell. There're further six years of extension options that has just gone back onhire following this drydocking in Brest. The Bodil Knutsen which, is our largest shuttle tanker operator in North Sea is ice class and on charter to Statoil ASA until May 2019. There are five further years of extension and options. Statoil has recently been given permission to proceed with the development of Johan Castberg in the Barents Sea. And this should provide medium term employment and security for Bodil. Four of our vessels are on long term bareboat charter to Petrobras Transporte. These vessels are amongst the youngest in the Petrobras fleet being delivered between 2011 and 2012 and are heavily utilized. Dan Sabia and Dan Cisne are of unique size and Fortaleza and Recife have shallow drafts with lots of thruster capacity. Delivered in 2013, the Carmen Knutsen is on charter direct for Respol Sinopec until 2023. The Ingrid Knutsen was delivered in December 2013 and is operating in the North Sea on time charters for Standard Marine Tonsberg, a Norwegian subsidiary of Exxon Mobil. This will expire in the first quarter of 2024 with charterer options to extend up to five year. The Raquel Knutsen was delivered in March 2015, and is operating on a time charter, which expires in 2025 with Repsol Sinopec in Brazil; there’re again options to extend to 2030. Tordis is on a five year time charter to Brazil Shipping, subsidiary of Shell. This will expire in the first quarter of 2022 with the charterer option to extend up to maximum of 10-12 years. Just to shift from Tordis to Vigdis Knutsen on similar terms to Shell with expiring charter in the second quarter of 2022. Slide 16, significant growth since the IPO with the latest addition, which again demonstrates our sponsors’ strong support and commitment to the MLP, we have already added eight soon to be nine vessels to the fleet, a 225% increase in four years. Our dropdown inventory today includes two further potential acquisitions. There're currently two more shuttle tankers and we acquired them from our sponsor, Knutsen NYK. One sister vessel to Tordis and Vigdis, Lena Knutsen, which is launched -- which is on the water now and is chartered to Shell -- will be chartered to Shell and one Suezmax class DP2 shuttle tanker from Cosco to be chartered to Petrogal. Both currently have five year contracts attachment and may average of eight years of option. Our recent acquisition to Racquel, Tordis and Vigdis and all our dropdown inventory will operate in the Pre-salt oilfields in Brazil. Slide -- in summary then, KNOT Offshore Partners is in essence a midstream mobile pipeline business for the contract revenue streams. Since being awarded its first two contracts in 1984, Knutsen has grown organically for over 30 years. As the business has been built into a sizeable fleet of these tankers, currently 31 billion is including orders. We've a solid and highly profitable contract base generated by our modern fleet, which by the end of June, will have an average age of around 4.25 years. The fleet has delivered another steady quarter taking into account the scheduled drydocking of Windsor and the offhire related to Raquel Knutsen. We've completed the acquisition of Tordis and Vigdis and -- completed acquisition of Tordis and went into a share purchase agreement with the acquisition of Vigdis Knutsen. We've placed $145 million in new equity in addition to the $100 million worth of long term debt in the quarter, which has been utilized for growth acquisitions. And no one has more experience in operating a sophisticated shuttle tanker than Knutsen offshore, and we operate these assets with real expertise. Today, supply timing and the market is expanding and with tenders back, the sponsor expects to build a further dropdown inventory. We have a supportive sponsor who has a large asset base with which to build the MLP, and we'll capture a good proportion we believe of the expanding market. Coupled with this, we remain in attractive value proposition with quarterly distribution of $0.52 per unit with around 9.2% yield. Thank you. And I'll turn it over for Q&A now.

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session [Operator Instructions]. Our first question today comes from Spiro Dounis from UBS Securities. Please go ahead with your question.

Just wanted to ask first about the refinancing activity, looks like a pretty big cash positive event on the Hilda Knutsen, I think $24 million is what you mentioned. And then also you've got another two more in the hopper there, between Torvill and Ingrid. As we think about how much cash you could extract out of those refinancings. Can you give us a sense of where that is and then what you plan to do with that cash flow, whether it's later this year or in '18?

Well, obviously, we're very happy with the Hilda refinancing, and we're looking to ways to do something similar on the Torvill. But obviously we haven't -- this is the biggest bilateral deal in Mitsubishi in shipping. So we're very pleased with the refinancing. I don't know if there’s banks out there would do something quite as big as that bilaterally. So obviously, during the next year, it'll be a bit more complicated we'll have to put together a syndicate of some sort. But obviously the sponsor is looking at raising more capital on the Torvill. And the idea would be to use that to acquire another vessel, if we can raise financing on that, we might. We can certainly drop a third vessel in the way things are looking now and we probably look to leverage up and basically grow the cover -- and the MLP through leverage. But at this stage, it’s the early stages of talking to people. And we've got -- it's two to three months down the line from the Hilde and we've still got a good 15 months before we have to start worrying about. And we're not under any pressure now because the amount of capital we've raised recently.

And so you mentioned potentially linking up refinancing and any cash inflows with doing out there drop. I guess I got the sense before that you listed all your sources of liquidity. Should we assume that if you do that third drop this year, it's not really contingent upon much in the way of raising additional capital? It sounds like you've already got it. Or should we connect these refinancings with doing a third drop? Øystein Kalleklev: It's Øystein Kalleklev. Also just mentioning on the refinancing, so of course the Hilda and Torvill they were financed by a syndicate of tanks and now we're taking out one of the vessel and just financed it bilaterally with Mitsubishi. So we are thinking of doing something really similar of Torvill. But we have to take this stepwise. When it comes to the Ingrid, it's actually a fairly small portion of the loan, which is maturing at end of 2018. The Ingrid loan is actually what you would call ECA loan, so the Norwegian government is lending off the big portion of that loan, and we have some commercial banks, have our loan attached to that. So the ECA facility doesn’t mature before 2025 actually for Ingrid, but only the commercial terms. And so that should be no problem refinancing. But there is no really rush to do it since the vessel is on charter for 2025. So I think we are already confident about sitting in place similar refinancing at Hilda. And of course we are in the market talking to banks we have very good access to debt finance. And kind of the liquidity question, we have no means that we -- when we are saying that we have balance sheet capacity to add another vessel in third quarter, it means that we have that secure today, the ability to do, that was done through this preferred equity issuance, which will take place on 30th of June.

And that answers to my question is kind of where I was getting at from the balance sheet capacity standpoint. Just second question here, I just wondered, the dropdown inventory, you got two left; one, sounds like maybe could happen this year, which leaves one more for '18. Can give us a sense for how quickly the sponsor can replenish the dropdown fleet? And at one point, do you go after the market and make third party acquisitions. Is that still years away in your view?

No, not necessarily. They are obviously from placing an order, winning a tender to construction completions about two years. So we may gain access to third party acquisition or we might just wait here, we certainly are quite relaxed now. We’ve got this growth out the way, and we feel there is plenty of interest out there in new tankers I think it's time to show, but we haven't had it and haven't translated into any tenders yet. We’re still -- the Statoil can -- contracts haven't been awarded yet. We’re still involved with that. Obviously, not the only partner involved with it, so participants involved with it, so we can't say whether we’re see that or not. And going forward, I think we started to see quite a few or majors asking about shuttle tankers, so we’re relatively relax about it. Obviously, we can't go in a very stable study way because it depends on what contracts we win. But we think we’re extremely well placed to win quite a lot of these tenders that are going to come out.

Our next question comes from Hillary Cacanando from Wells Fargo. Please go ahead with your question.

I just had a question about the Windsor Knutsen charter. I know that’s a expiring in October this year. Just wanted to find out if you have been in discussions with Shell for an extension or with any other charterers for implement?

We haven't. They have six month declaration window. Is it six or three, Øystein, actually this… Øystein Kalleklev: It's three months, so they will declare in July whether they want to continue with this low cost area, the income of business that’s guaranteed by the sponsor until April 2018. But we are in talk with Shell. So they will inform us in July whether they will use that first option to extending charter.

So until July, you’re not allowed to talk any other charterers? Øystein Kalleklev: No, they have indiscernible] to exercise the option -- and the market for shuttle tankers are already tight these days, so we are not loosing fleet about it.

And then just on Hilda Knutsen and Torvill Knutsen expiring in 2018, I know it's kind of early. Are you in discussions at all or is it still too early?

Just following the agreements with we left -- we can refinance the ship, so we’re not under any pressure to push them to exercise renewal. I mean the good thing about those two ships is they’re really specialized, I mean you just can't replace them without -- you have to construct any vessels and this is going to take 2.5 to 3 years. So I mean I am thinking on those line anyways, which we have a good relationship with them and we’re pretty confident that we just rolled into the new agreement.

Who owns the third? I think last time you had mentioned that there is the Hilda Knutsen to Torvill and there is another shuttle tanker, serving the Goliat field. Who is the third one? [Multiple Speakers] Øystein Kalleklev: There are three vessels in the world, which can load oil on this particular FPSO and this Hilda, Torvill and Eagle Bowden, so substitution of this is [indiscernible].

And then you mentioned different tenders during the call, and I think last -- either last call or the call before, you said there were tenders for more than 40 vessels up to 2020. I was just wondering if that has changed at all, has that gone up or down? Is it still 40 vessels?

Well, that’s currently the projection. We’ve never said that. But we do think it's a pretty good stuff. I mean what I would say is that when you see the way the vessels trade in the presold, the Petrobras voyage are pretty straight in out Brazil, but the international oil companies tend to do longer voyages. And one of the aspects on Investor Day we saw that like the Shell and Petrogal and all these ships were doing between eight and 10 charters a year, and the Petrobras was doing around 28 to 30 voyages a year that really should -- and these were small destination flexibility with the international companies. And what we see recently is excellent based and talk to Petrobras now about licensing part of the pre-salt, which is all very positive, not for last major oil major hasn’t been in zone, actually taking -- looking to take a slice of the pre-salt and happens. And I think you will see an increase in demand for sure. I mean the good thing about having a lot of oil majors involved is they all tend to elect to use their own ships, and they also tend to like to have destination flexibility on the discharge, which tends to increase demand for shareholders. So though we see at the moment we’ve not seen translated yet into firm orders. I mean the markets have been quite volatile in shipping space and the offshore has been a bit subdued. So we’ve not translated yet into firm orders, but we see that interest is definitely there. And we do think that we will -- you will see some activity fairly soon.

I just have a one quick follow-up question. Does three shuttle tankers that are serving the -- that has the capacity to serve the Goliat field? Do you know if there are any other, like a newbuild, that are under construction that would have this capacity or no? Like a special... Øystein Kalleklev: Four newbuildings, the four vessels on order; three of them are from [indiscernible]; they will go to town about, they cannot load on Goliat; and the fourth one is Lena Knutsen, which will go on charter to Shell; so all these vessels are tied up for long term charters.

[Operator Instructions] Our next question comes from Ben Brownlow from Raymond James. Please go ahead with your question.

Just two quick ones near term kind of thinking about second quarter, the Windsor the incremental bunker costs that you had around $600,000 in the first quarter. Is there any incremental bunker costs related to that drydocking that will fall into the second quarter?

No, it's pretty clean in the second quarter. It's back on high on the 4th of April. So the costs been captured in the first quarter.

And just one more from me, the Raquel repair costs that $600,000 I guess roughly $400,000 is going to be reimbursed by insurance. Ay idea on the timing of that?

For the second quarter, it will come on in the second quarter but it depends how quickly they do the file. I think it will be certainly before the end of the -- it should be the second quarter really.

[Operator Instructions] Our next question comes from Nick Raza from Citi. Please go ahead with your question.

Just a couple of quick follow-on questions about the bunker fields, there is a mandate that states that a lot of the marine vessels are supposed to reduce sulfur emissions very drastically by 2020. Could you just talk about what the impact of that is on your fleet?

We tend to -- we can burn most of fuel oil [indiscernible] I guess. We’re not in U.S. floating areas, we have weeks of it, it doesn’t really affect us too much. Øystein Kalleklev: And it's also -- it really has to highlight the effect of that. When you have the vessel on time charter the cost of bunkers is for the charter, the account so we don’t pay the bunkers cost. So that the charter is obligated to find out and pay for the bunker, so it's not kind of our cost but also unusually with marine and gas or oil. So this is more like suitable what I would call commodity shipping like conventional tankers or cruise operators; so all contain the vessels.

Then I guess the other question I have was I mean during the Analyst Day I mean you guys did a great job of presenting some of your current assets and you currently have a fairly large portfolio of LNG vessels. Is the thought for the MLP to continue to be pure play oil, or is at some point in time, do you expect you can actually drop down some of the LNG vessels or your backlog could increase in corporate LNG vessels as well?

We’ll not be answering for the sponsor side. So as long as we said our outlook of certain tankers there along with reason for kind of meeting it up. So we don’t even -- we don’t want it to be a non-calls MLP. But the thing is we see a lot of tender activity this year, so we do expect that we will add to the drop down inventory during the year.

Okay.

If we kind of dropdown assets very quickly, of course the LNG could be a potential asset class since the charters are detained. Shell is the biggest charter on the LNG as well. And basically LNG is a floating pipeline similar to the shuttle tankers. But so far we have not contemplated doing it.

And then, and I guess just turning to the finances a little bit more. I mean you mentioned that you would not increase the distribution right now, because there’s sort of an equity overhang and you'd rather pay debt. But at what point do you think or at what level do you think that might change? And understanding that the market still may not give you credit, but any thoughts on that?

At Investor Day, we guided that we migrate raise 0.01 at the end of the year, but we're not -- I mean it's not out decision downstream nor the [indiscernible], but we'll look at -- so we'll propose depending on where the unit price goes to as well, ultimately we would like -- so there’s been the price that go significantly we'd like to defend it. But when you’re roughly at 9.25% yield you sort of think well. I mean for all these investments we make, we just starting we’ll left out the cover, because now it doesn't makes sense. I mean I think a normalized MLP should have a distribution increase of 2% to 4% a year in a normal environment, and that's why we probably try and aim for. But today we’re a bit more relaxed about, because we think we've a very good value and we've a very good growth story and we've a good yield. So we’re quite relaxed about distribution increases [multiple speakers].

And at this time, I'm showing now additional questions. I'd like to turn the conference call back over to management for any closing remarks.

I'd just like to thank everyone who attended for attending, and I hope you found the information we disclosed valuable. If you want any more information, please feel free to email me or Øystein. And my contact is on the Web site. And thank you for attending.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.