John Costain - CEO Øystein Kalleklev - Chairman

Hillary Cacanando - Wells Fargo Nick Raza - Citi

Good afternoon and good morning. Welcome to the KNOT Offshore Partners LP Second Quarter 2017 Earnings Results 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. [Operator Instructions] Please also note that today’s event is being recorded. At this time, I’d like to turn the conference call over to Mr. John Costain, CEO. 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 website. On today’s call, our review will include non-U.S. GAAP measures such as distributable cash flow and adjusted EBITDA. The earnings release includes a reconciliation of these non-U.S. GAAP measures to the most directly comparable GAAP financial measures. A quick reminder that any forward-looking financial 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 the duty to update any forward-looking statements. And now on to the presentation. KNOT Offshore Partners, KNOP, focus is on the Shuttle Tanker segment. The asset is field-specific and integral part of the logistic supply chain. It provides a vital service transporting oil from the offshore oil production unit to shore side shore side. In essence, a midstream mobile pipeline business. Shuttle Tankers operate in a space which will see substantial oil production growth in the coming years. The vessels are built to charters’ requirements and used on specific oil fields. They attract contracts which give them long-term, non-volume-based revenue streams. Although our MLP is young, our sponsor is very experienced operator having been involved in the design and construction of these type of vessels for over 30 years. Today, the Knutsen Group has more than 30 of these high-specification tankers building the fleet organically during this period. And on these sectors, there has been no speculative oil drill, so the partnership should yield both stable and sustainable revenues longer term. Following on from the recent acquisitions of Raquel in 2016, Tordis in quarter one, Vigdis in quarter two, we are pleased to announce further additions to MLP fleet, the Lena Knutsen for an acquisition price of $142 million. The vessel was delivered in June 2017 and should commence five-year charter to Royal Dutch Shell in September. The acquisition by the MLP should then occur at the start of October 2017. 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 had a fleet of four vessels with an average age of 3.25 years. In the space of four short years, the fleet would have grown 250% to 14 vessels with an average age of about 4.25 years. Now turning on to the presentation, Slide 3, the financial highlights. The Partnership generated its highest ever quarterly revenues of $54.4 million, operating income of $26.1 million and net income of $16.9 million. It generated its highest adjusted EBITDA of $43.5 million, distributable cash flow of $23.4 million, and we also wrote our highest ever distribution coverage ratio of 143%. The fleet operates with 100% utilization for scheduled operations, including insurance fees for the Raquel of high this quarter. On the 15th of August 2017, the Partnership will have cash distribution of $0.52 for the common unit with respect to Q2. The distributable cash flow of $16.6 million, we made a record $17.4 million distribution payment including recent common and preference units. Since our initial public offering over four years ago, we have declared and paid common unit distributions of $8.22. So our initial investors will have received a total return of 39%. Our current yield has stable distribution of around 9%. Slide 4, other events. On August 15, the Partnership entered an agreement, as previously stated, to purchase the shares of the company that owns the shuttle tanker, Lena Knutsen from Knutsen NYK Offshore Tankers. Knutsen NYK are sponsor. On the 1st of June 2017, the Partnership completed the acquisition of the entity that owns the Vigdis Knutsen, completed the successful refinancing of the credit facility secured by Hilda Knutsen. The Hilda with refinancing removed the next repayment that fell due in August 2018. At the same time, we raised an additional $25 million, reducing the loan margin by 30 basis points. The cost of the facility is 1%. We entered into an agreement for a new $25 million unsecured revolving credit facility in order to further strengthen balance sheet and increase financial flexibility. On June 30, KNOT successfully completed a private placement of $1.66 million additional Series A preferred units at a price of $24. The net proceeds were around $38.8 million. Subscribers to the instruments are largest international firms located in three different continents. The placement will enable the Partnership to acquire the Lena Knutsen on the 1st of October, subject to a satisfactory agreement to Shell. There are no preemptive rightswith this preference issue, which are quite common to such agreements, and this is to the detriments of the issuer. The expansion of the issue is evidence that KNOT is proactive in finding other sources of capital-accretive terms, when constrained by our equity markets. The private preferred potential convertible equity instrument carries a fixed coupon of 8% allowing KNOT to continue to go through creative acquisitions. It is not subject to adjustments and is convertible into common equity after two years and adjustable strike price, which is the dependent on the development of the book value of the partnership. You original issue had a strike price of $24, and today [Indiscernible] in quarter 1%. On 5, July 2017, Knutsen NYK acquired from Chevron the Brazil Voyager, a DP2 Suezmax class shuttle tanker built in 2013. The vessel, which is located in Brazil, is not currently under contract. The vessel has been renamed Brasil Knutsen, and Knutsen NYK is seeking to secure a long-term time charter for it with a view to placing it in the MLP. Slide 5, income statement. Total revenues were $54.4 million for the three months ended June 30, 2017 compared to $45 million for the three months ended March. Q2 revenues were positively impacted by increases in time charter earnings, these were positively affected by, while Windsor Knutsen being fully back on hire after completing its 10-years special survey in drydocking at Brest yard, France, during the first quarter; Raquel Knutsen being back on hire following completion of the past risk controllable pitch propeller; Tordis Knutsen being included in the results of operations from 1, March 2017; and Vigdis Knutsen being in the results of operations from 1, June 2017. Vessel operating expenses in the second quarter were $9.4 million, a reduction of $900,000 from $10.3 million in the first quarter. The reduction was mainly due to the Raquel Knutsen claim adjustments in the second quarter and also some savings on OpEx driven by foreign exchange savings. The NOK is low compared to the US dollar. General and administrative expenses of $1.5 million in Q2 were in line with the previous quarter. Interest expense for Q2 was $7.3 million compared to $6.2 million for Q1. The increase was mainly due to additional debt incurred with the acquisition of vessels Tordis and Vigdis Knutsen. A higher LIBOR rate has also had a small impact. Interest rate swap agreements totaled $536.7 million. The partnership received interest based on LIBOR and paying a weighted average interest rate of 1.65% with an average maturity on these instruments of 4.1 years. We also have foreign exchange forward contracts. These are economic hedges that's locked by due cost and total $40 million against the NOK at an average rate of 8.31 per US dollar. The financial results are impacted by the change in the market by these instruments and realized and unrealized losses in Q2 were $1.5 million compared to a gain of $0.5 million in Q1. As a result, net income for Q2 was $16.9 million compared to $11.4 million for Q1. Slide six, adjusted EBITDA. In Q2, the partnership generated adjusted EBITDA of $43.5 million. It compares to $33.2 million for Q1. Adjusted EBITDA refers to earnings before interest, taxation, depreciation and amortization that provides a proxy for cash flow. Adjusted EBITDA is a non-US GAAP measure used by our investors to measure the partnership's financial performance. With a wasting asset like a vessel, younger fleets in theory should produce lower EBITDAs for every dollar invested. The annuity effect reduces the value lost in early years, which is factored into the replacement CapEx calculation for the distributable cash flow. At the end of Q2 the KNOT fleet of 13 vessels have an average age of 4.3 years compared to the rest of industry average for shuttle tankers including KNOT of around 12 years. In general, since the formation of MLP, we have had very high levels of vessel utilization, on average around 99.7% for scheduled operations. Financially, this translates into continually high and increasing predictable revenue, adjusted EBITDA and discounted cash flow as more vessels are added to the fleet. Slide 7, distributable cash flow, another non-US GAAP measure to estimate distribution sustainability. Today, we report our highest ever quarterly distributable of cash flow of $23.4 million in Q2. This compares to $15.6 million Q1. We maintain our distribution level for Q2 of $8.52 per unit equivalent to an annual distribution of $2.08. The distribution coverage ratio for the quarter is a gain or highest ever reported at 1.43 times. The coverage ratio has increased primarily due to the equity overhanging removed. The common unit issuance $54.9 million and the preference unit $48.6 million made our first quarter from the acquisition of Tordis and Vigdis on June 1. The preference issue $38.8 million approximately in second quarter will be used help finance the equity required to run our acquisition on 1st of October. The outlook for the third quarter should improve further as the big Knutsen will be on hire for this whole quarter. The MLP has an elevated deal compared to most MLPs, and therefore, we have relative focus on firstly building coverage and then deleveraging when not making accretive investments. There is little benefit to this MLP campaigning of much over 9%. We have raised funds between $21 and $29 per unit and many of our common unit holders have remained loyal, so we do not want to dilute and we see double-digit distributions as a signal that investors would rather prefer increased coverage and investments and secondly de-leveraging rather than increasing dividends. The coverage ratio of 1.43 in Q2 gets flexibility with regard to our capital base and also there is recent increase in the distribution. Slide 8, balance sheet. At the end of Q2, we had a very solid liquidity position with cash and cash equivalents of $64.5 million and an ongoing undrawn credit facility of $5 million. The credit facility is available until June 2019. In addition, the Partnership has accepted an offer of an unsecured revolving credit facility from NTT Finance in Japan. The amount is for $25 million for a period of two years from 30th of August, 2017, a margin of LIBOR plus 180 basis points with a commitment fee of 50 basis points. There is no arrangement fee. We have a predictable cash flow, and we do not have any loan maturities before the second half of 2018, primarily -- 275.6 million outstanding, we are looking at this with a view to refinance before the end of the year. The total interest bearing debt outstanding was about $906 million. This has increased due to the acquisition of Tordis and Vigdis commencing. Annually, we currently have scheduled repayments of $65 million. This compares to a current annualized replacement and maintenance capital expenditure charge of $40 million when computing distributable cash flow. Slide 9, Pending - Lena drop-down. We announced the latest addition to the MLP fleet. Built by Hyundai Heavy Industries in June of 2017, the Lena commencing Tordis and Vigdis is a Suezmax class enhanced DP2 shuttle tanker operating under time charter expires in the third quarter of 2022 with Royal Dutch Shell in Brazil. There will be options to extent until going to 2032. We have agreed with our sponsor Knutsen NYK to acquire the vessel for $142 million with delivery effective from the start of October 2017. The purchase price for Lena is 142 million, which is 5 million less than the purchase price for Tordis and Vigdis, the sister vessels. This is despite vessel being that younger, and the other 2 dropped down. The 3.4% lower purchase price reflects the reduced TC rate of about 3.4% of about 3.4% of obit Tordis and Vigdis. When the line of time charters has entered into, interest rate levels were a bit lower on US dollar a bit stronger compared to NOK, which gave benefit on the future. Capital and operation costs. These were passed on to the charter. The purchase price therefore reflects the slightly lower percentile of Shell charter compared to Tordis and Vigdis. The vessel is a sister with be same technically advanced features. The vessel will be part financed by a commercial debt of around $92 million and partly cash from preference debt equity around $9 million. The senior loan has margin of 190 basis points with an annual repayments of $5 million. The net charter rate will yield around $7 million in net income and approximately $15.8 million of EBITDA for the first year from October 2017. The charter has an escalator of about $600 per day applicable annually to over $1,000 on the other day. As a review of our sister vessel, the vessel comes with an attractive loan, 19-year profile, and a margin for 190 basis points of top line. With this acquisition, which again demonstrates our sponsors’ strong support and commitment to the MLP, our fleet would have grown 250% since the IPO in April 2013. Slide 10, long-term contracts backed by leading energy companies. The Windsor Knutsen has been on a two-year contract from 13th of October 2015 with Brazil Shipping, a subsidiary of Royal Dutch Shell with a further six years of extension options. In July ’17, the first option is listed taken charter codes reaching October 2018. The Bodil Knutsen, which is our largest shuttle tanker operator in North Sea is ice class and on charter to Statoil until May 2019. There are further five options to extend. Four of our vessels are on long-term bareboat charter to 2023 or 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 to Respol Sinopec until 2023. The Ingrid Knutsen was delivered in December 2013 and is operating in North Sea on time charter to Standard Marine Tonsberg, a Norwegian subsidiary of Exxon Mobil. This will expire in the first quarter of 2024. The charterer has options to extend the charter for five one-year periods. The Raquel Knutsen was delivered in March 2015, and this operates under a time charter expires in the first quarter of 2025 with Repsol Sinopec in Brazil. There are options to extend to 2030. The Tordis Knutsen is on a five-year time charter to Brazil Shipping, one of subsidiaries of Shell. This will expire in the first quarter of 2022. The charterer has options to extend the to additional five-year options till the 15 years. The sister ships of Tordis, the Vigdis and Lena Knutsen on similar time charters to Shell expiring in the second and third quarters of 2022, again, with options to extend a further 10 years. Slide 11. Significant growth since the IPO with the latest acquisitions, which again demonstrates our sponsors’ support and commitment to the MLP, we have already added nine, soon to be 10, ships to the fleet. Since the IPO, this represents a 250% increase in 4.5 years. Summary. KNOT Offshore Partners is in essence a midstream mobile pipeline business fully contracted revenue streams. Since being awarded its first two contracts in 1984, Knutsen has gone organically for over 30 years as the business has been built into a sizeable fleet of these tankers. Currently, 31 units including orders. We have a solid and highly profitable contract base generated by our modern fleet, which by the end of June will have an average age of 4.25 years. The fleet has delivered the MLP’s best ever performance for EBITDA, distributable cash flow and distribution coverage ratio. Since the formation of KNOT, we've very high levels of vessel utilization, on average around 99.7%. Financial discounts forms into high and increasing predictable revenue streams, adjusted EBITDA and discounted cash flow as more vessels are added to the fleet. This year, we've so far completed the acquisitions of Tordis and Vigdis Knutsen and eventually into a share purchase agreement to acquire the Lena Knutsen. In the year-to-date, to finance those acquisitions, we've raised about $145 million of new equity and a $100 million of lump-sum debt, together with $25 million in credit facilities, all on attractive terms. No one has more experience in operating these sophisticated shuttle tankers at Knutsen offshore, and we operate these vessels in real expertise. Today, supply is timing and the market is expanding, and with tenders back soon, the sponsor expects to [indiscernible] drop down eventually. We've a supportive sponsor and we remain on attractive value proposition with a quarter distribution of $0.52 per unit around 9% distribution. Thank you, and if anyone has any questions, I'm happy to take them now.

Ladies and gentlemen, at this time, we'll start the question-and-answer session. [Operator Instructions] And our first question today comes from Hillary Cacanando from Wells Fargo. Please go ahead with your question.

So recently one of your competitors orders 2 DTT shuttle tanker newbuilds with LNG propulsion technology, I was just curious is this technology, I guess, to be able to use LNG as a fuel, something that you expect will be included in shuttle tanker newbuild going forward? Would this be a normal this kind of like a one-off do you think?

I think, with the North Sea, it might be more prevalent because there're emission criteria. They are basically restricting the greenhouse gases in that area of operations. So I think it was quite prudent for them to do that, the shipping legislation going forward and what replacing. But it's not really, it's down to what the charter -- what the charter specifies when you go to the vessel as to what we build. Generally in Brazil, there's no requirement to - ships. I means, it's little more expensive. I mean, probably rest you can management talks it over [indiscernible]. But basically, we will build to what the charter requirements are, not what we need to do, and it's time for the charter to make a decision on how he designs vessel to that level, because basically partner deal [indiscernible]

And then just I know your next -- I think your next maturities are, I guess, due in October 2018 and December of next year, and I know you've been able to tap attractive bench financings, but I was just curious -- just wanted your thoughts on the capital structure plan? Would it look fairly traditional with bank finance -- bank refinancings or would you look at some refi options? I know we’ve seen lot of sales leaseback transactions and stuff at just MLPs as well, so just wanted to get your thoughts on your structure plans?

Yes, he have Øystein here. Why not? Øystein Kalleklev: Just to mention on the refinancing, of course we’ve taken out the first facility that mature for Hilda Knutsen, and of course sister vessels. So we are looking into doing something similar in terms of financing program. And as John mentioned in his presentation, something in place by year end before the loans turn into our portion in our balance sheet. And then of course there are also maturity on the [indiscernible] loan but that is more long because most of that loan is actually export candid loan that matures in 2025 and it’s only a small commercial bank transfer matures at end of 2018. But that we will also refinance. So we will see whether we put together with some other loan or how we actually do this. When you do have a time charter with extra month in 2024, that’s not really a issue doing the refinancing. So it’s more about finding the alternate solutions. When it comes to, say, leasebacks, it could be - basically it’s a little bit but we do think that we have so good access bank financing that go into some other leasing company in order for them to kind of finance it through the banking system. It also make that much sense for us because we have a very good access bank finance. And so, our finance to do this fairly simple, finance or - mostly bank financing and then of course relying on the equity market for risk capital. And so far we haven’t done any bonds and the reason is it’s a fact that we have already new fleet and we have a good backlog so that gives us good access to bank financing. And rather than doing bonds we have decided to do this, preferred equity. We think that it’s more financially prudent. We have a debt maturity on that instrument and we have the stake option and have a fixed deal of 8%. And if you’re doing a bond, it wouldn’t be that much and you would probably have a high percent on those loan. So we think -- but of course we have flexibility if there are some good financing opportunities we might take benefit of it and I think we just moved it with the facility we did with [Nippon Telecom] in this quarter but we are open to look at all those structures if we find effective and of course unsecured loan at LIBOR plus one we think is effective. Just to mention also when it comes to this LNG field of course just [indiscernible] out of thrust to be linked with LNG propulsion, In the shuttle tank the market this is not only related to shuttle tank, you see the same discussion in the container segment, also people are concerned whether to go for LNG fuel or considering where to go for LNL fuield So this is something we will of course monitor I think for the [indiscernible] were highly specialized with the compact top to 20 and of course with topper then may be sitting with his until 2029 I do think they want to have the security of having the right kind of technology in terms of propulsion system. So related to the emission systems in the Norwegian sector. So that process is costly so cost $10 million, $15 million to have this.

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

Thank you. Really quick. John mentioned new tendering activity and potentially the possibility of rebuilding a backlog. Could you just speak a little bit more about where this tendering activity is, North Sea versus Brazil? And then how the new tendering activity is coming out in terms of rates and just give us your initial thoughts on that? Øystein Kalleklev: Of course, predominantly the lead for shuttle tankers are in Brazil, but right now of course within four orders this year and all of them are for North Sea, and of course two of them are specialized for Brazil in the balance and then of course Teekay when they have resolved the financial situation they are finally in a shape to renew the [indiscernible] which have edge quite lately. But so in general I think going forward I think we will see more activity from Brazil in terms of they are fairly stable, they are a bit dependent on the interstate level, yacht cost and then of course specification of the rest. On the sponsor side we have just acquired a vessel without any contract attached to it, and the reason for this is that we do see that there is pent-up demand for vessels and we want to position ourselves for some of these charters. John, maybe you have something to add?

Pretty comprehensive, I think we would like to see more growth in business, being a bit slowly, we expect to pick up more by now. Obviously, Teekay, I should mention by name, they obviously have requirements for new fleets and they are just ordering on the basis they reposition. Now it’s good to see that they are going into shuttles again. So we expect market to pickup. But we haven’t, it’s not evolved quite as quickly as we expected it to, just how it is you know.

Okay. And then I guess in terms of the new vessel acquired by the sponsor, do you sort of have a sense of timing in terms of when it gets chartered and what the drop would look like?

Of course we can get shorter contract but of course if we after prefer into the MLP, we will probably need a longer contract. So it’s a bit early to say how and when it might be feasible, we just took over the vessel. So I think we will go on the status of that contract, when… Øystein Kalleklev: And it can be placed a modern charter fleet ship. It can be given the flexibility when negotiating with the clients about tonnage requirements. We’ve seen in the past where we had to provide and intermediary solution before we can place an order. It’s quite a long lead time with these tankers, and some times it makes your acquire unit early, and it gives you quite a lot of flexibility if you got tankers around. Basically it's a competitive advantage.

And then in terms of the distribution I mean obviously you guys have used preferred equity in the recent past to sort of facilitate the dropdowns and they seemed to be somewhat slightly just slightly accretive to right about net even. But I mean in terms of what the equity investor could expect going forward in terms of distribution growth, John I don't know we've spoken about this in the past and we've discussed the difficulty areas in the distribution briefly, but any sort of color on that now that the shuttle tanker is getting a little tighter, you might have tendering opportunities in the backlog? Øystein Kalleklev: I obviously think when we've vessels and eventually we want to raise whole capital distribution room actually go up. Today we can elect to increase obviously we could as it is, but it gives us rather more flexibility if we don’t increase the distribution. It's not really my decision. I obviously have the capacity to do increase [indiscernible], but we've obviously been refinancing, must have refinancing ships by doing charter renewals, and we just want to see how things fall out a little. But obviously it does help to get interest in the unit while increasing distribution and a normal MLP you would expect and we would expect more in this way -- we'd expect 2% to 3% distribution increase per year because I guess an NLP is bit like a pension for a lot of people. But the reality is today, at 9% and the unit price not going up too much, we’re comfortable at the distribution level. If unit went up to $25, $26 and obviously we would definitely increase distribution. I'm sure we would because it would be -- we have to have a sensible yield on it, to make it attractive for people for purchase the units, but that yield unit price within the price, it’s a bit of this is a bit of check now. You don't load the distribution too much, if we haven't got unit price to support it. I think the number [indiscernible] anyway because if we keep the cover we don't raise so much equity and the MLP naturally strengthens over time.

[Operator Instructions] And at this time I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thank you for your interest in conference call and the questions we had were very good as usual. Appreciate the time you've taken, and if you like the [indiscernible] story go out and buy the unit. Thank you.

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