Good afternoon. And welcome to the KNOT Offshore Partners LP Earnings Release Fourth Quarter 2018 Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would like to now turn the conference over to John Costain. Please go ahead.

Thank you. If any of you have not read the earnings release or slide presentation, they're both available on Investors section of our Web site. On today's call, our review will include non-U.S. GAAP measures, such as distributable cash flow and adjusted earnings before interest, taxation, depreciation, amortization, the 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 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. KNOT Offshore Partners, focuses on the shuttle tanker segment. The individual tanker is field-specific and an integral component in the offshore value production chain. Shuttle tankers operate in a niche space and under non-volume-based contracts to transport oil from the offshore production units to shoreside. Being built to the charterers' requirements, the tankers are generally used on specific oil fields, enabling the partnership to yield both sustainable and stable revenue longer term. Oil production continues to move further offshore, so shuttle tankers operate in a space which will see substantial growth in the coming years. Our sponsors are very experienced operator having been involved in the design and construction of this type of vessel, growing its fleet organically for more than 30 years, and is part of one of the largest shipping groups in the world, Nippon Yusen or NYK. NYK is a member of the Mitsubishi Keiretsu. Now, the presentation Slide 3. For the fourth quarter 2018, the partnership generated another very solid set of results; total revenues of $70.9 million; operating income of…

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Hillary Cacanando of Wells Fargo Securities. Please go ahead.

Why was Windsor Knutsen charters are suspended with just one-off, get an idea of what is the view…

They actually show approaches about a few months ago and said, they had a bit of the surplus capacity in Brazil on the shell tankers. And they were asking, if we were interested in chartering a ship from them and we obviously needed a vessel in West Africa. They weren't initially prepared to give us a Windsor, but they said, okay, we asked them for one of our ships if we're going to do that. In the end, they agreed to let us have the Windsor back. So we have good news in West Africa on a contract we have there for eight to 10 months, probably the sponsors using it. And he's paying back-to-back rate, which is the same as what was on the CP with Shell. And effectively, that means that the MLP will see rather than the next as we're kicking in, they will continue with that charter at the back end of the substitution period. So effectively it extends this period on the vessel for the partnership and that's really what's happened. Shell, obviously, production hasn't quite been enough to utilize the vessel on to present and they've just been a bit more efficient than the process, if we needed the shipments that would take one of our back.

So this isn't a situation where like they could -- the suspension could continue after the…

No, they've got a firm period on that. They wanted the ship, they are happy with the Windsor Knutsen. It's just could we said if we're going to charter the ship back to one of ours that's why we got four ships on charter to shell in Brazil and we'd rather have one of our ships to somebody else's logically.

And then Bodil Knutsen, the extension options, are they -- I think the last one was at a lower rate, the last extension?

Yes, they are at lower rates. Yes, that's correct.

So the remaining ones, are they going to be at lower rates?

They ask us an escalator on for the lower rate is increased so basically, it stops at a lower level, but it escalates every year…

So like for the next one that would be higher than the current pay but have a…

No, the current rate is the old charter rate and then the new rate, the first new rate is lower and then the next new rate is still lower, but it's higher than the other rates, so there's an escalator on the option periods basically.

So it will higher than the previous one. Okay, got it.

Yes, but not…

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

Just a follow up on the Windsor Knutsen. Just a few months around the timing there. Any specific variables that will influence the recommencement of that charter with Shell?

No, it's basically start on the 4th of March, and it's between 10 and 12 months and then Shell take the ship back to -- down the remainder of the one year option and then the other options kick-in the enrollment.

And you said they were back-to-back. So, there is absolutely no cash flow impact from repositioning or anything like that?

There's no difference on the rate.

And on the Bodil Knutsen, can you just give some color around the demand backdrop you're seeing there around the Johan Castberg field?

Well, I mean, I'm not sure. The things with the Bodil, so it's been 1 million barrel ships slightly more than that and generally in the North Sea, most of the vessels are Aframax size. Now Statoil trying with the idea of moving the ship, they might move it to Brazil, they might keep. And we're working in the Barents Sea. I mean, we don't know exactly what their plans are at this stage. I mean, I would like most of [indiscernible] from much longer, but I think that's an open discussion. We'll start update, definitely ship long term it's just how they deploy the assets. It's has always been a bit of a tough story, had a bit of a heck on the rate, because it's always been a bit of a non-standard ship like the Windsor as well. These two vessels were not really built specifically for the fields that they're operating on now. The Windsor is an ice class tanker working in Brazil and the Bodil is a Suezmax tanker, which was built with the idea of the Barents Sea in mind, because its ice class, but there haven't been a lot of development yet in the Barents Sea, and at the moment most ships are being built of aframax size, these just because the voyagers are shorter really. So, I don't know what -- at the moment, Statoil will keep the ship anyway. I have no doubt about the rates. They're happy with the rate and they want to keep the ship long-term. And there's not that many shell tanks around the country, the demand is quite tight. So I don’t see an issue there it's just the case is what they want to do with the ship longer-term.

This concludes our question-and-answer session. I would now like to now turn the conference back over to John Costain for any closing remarks.

I'd just like to say thank you and still probably my second to last in this call. I probably will do on end of May.

Mr. Costine, a couple of questioners just came in. Would you like to accept?

Okay. I'll take them. Yes, no problem.

Okay. Our next question comes from Robert Silvera of R.E. Silvera and Associates. Please go ahead.

Hi, John, and thank you very much for doing such a good job and I'm sorry to see you leave, but obviously you have future plans and that's good. My question is this. Right now, you have a coverage ratio of 1.51. Do you have an upper target in mind or anything like that for the future that if you reach that you would increase the dividend? Is there anything like that going on?

I mean, it's to say because I'm not strategically involved anymore with the business. But I think you've always got look at how the capital market is because this is an MLP and you use the distribution as a means to sell the MLP. And whether being a shipping company as well if you're not adding vessels, you increase the distribution you weaken the MLP in a way, because today it's obviously got a lot stronger because we've added assets, without pushing the distribution. And if the equity markets closed, it's hard to burn too much equity, now you don't want to do it in terms of the sponsor. Obviously, you're not hold the likes to receive cash, but that's the balance you've got to strike with. I mean at the end of the day, we are at the moment a very -- we've got a decent yield and the numbers look fine. So I mean, I don't think they'll change anything. I think also Knutsen, NYK doesn’t and it's under the units. So they don't want to damage their own stake. And that's also healthy for the individual unit holders, because I can see the sponsor has real investment in the MLP. So, that's really what I tried to emphasize. But I wouldn't like to comment too much on it, because obviously my assumption is end of May, so, I don't really have a lot of input on the distribution policy really. But I think what they're doing is very sensible today.

What is troubled me is if the distribution as past conference call says, is going to be pretty much fixed at the $0.52 a quarter and $2.08 per the year. If it stay fixed like that, the stock price has seem to been depreciating just as the assets of the ships are depreciating. So I guess…

So the leverage comes [Multiple Speakers] using that new ships, that's the thing, that's the key, because obviously these vessels deleverage, that's basically what we do with the excess cash we just patented. So we end up with less debt on the ships. And then you -- as the assets come along, you try and buy through leverage rather than approaching the market for equity. And that's the way you deal with it or at least take a portion of the vessel through deleveraging. And that's how we built in the last two or three ships. And if the more you save on distributions the more you can do there and in the longer run, it's a long game, it's better, because obviously if you can invest at a decent rates. And you have to bear in mind as well as the sponsors of the business and they have to buy ships. And they have to raise equity and they have to trade the vessels. And accordingly, the MLP market is closed to a lot smaller MLP, I would say, the mid-stream space not with this. And you have to conserve a bit of equity where you can. So when the market reopens again, you can be a lot more optimistic and you can really push the distribution and raise capital.

But what do you see in the strategy that's now being carried out that would at least keep the prices and stock steady in that range…

Well, I mean, obviously just to see or even -- I think the changes in management doesn't really help. I think when ever you see solid results every quarter, you see solid results from the commitment of footprint down, people get more comfortable with it. It sends out a message. And over time the history and the quality of -- the continued quality of the balance sheet, it helps building a distribution is fine in the short term, but as a short-term fix if you are not having assets, then you're not being able to raise equity. It's more difficult. So you have to balance it but it's a definite balancing act, always was. And require mature MLP today in a way we've been trading for six years now. But I know where we are coming from. And my preference is today in the current market is to be conservative really. I mean, I think it's a sensible approach. At the end of the day, it got my mind as well as this is lots of people and have got lot of players invested in this business. And a lot of the sponsors, they come to me, so it's important to keep stability and keep good footprint and a good trading history.

Well, that's what is concerned us all as a company who invested in you as a company, love the dividends. But if the price is eroding on the stock at the same rate that the dividends are being paid, the net is not a good number…

Because something happened last two, three months and you, shouldn't start question too much and as long as the earnings come out well and you've got a good distribution it’s fine and you know, we retained -- the balance sheet looks...

But we're in a long game, but we want to be comfortable that the stability of the stock prices is there and the strategy on you guys should be such that you maintain that price of the stock, at 20 to 22, somewhere in that neighborhood and not down at 17.5, 18, in effect for this last year we've lost the total of the distribution.

Well, yes, it's a book loss, I mean, it will come back.

[Operator Instructions] Our next question comes from David Starkey of Morgan Stanley. Please go ahead.

John, congratulations on your job and situation it's been nice working with you over the years. I have a question on, obviously, the stock prices are little frustrating, but we've seen this before and today we're getting a good reaction to the consistent with strong numbers you've been putting up. The question I have, you talked about the strategy of not raising the distribution, but starting to pay down some of that debt. And I was wondered what kind of goals you have in mind of over the years and to do that and to clean the balance sheet up or get it even stronger?

Well, I mean lot of us shipping has been quite volatile in terms of asset values. And it's difficult to gauge how the -- also we've seen a team move into the market as well. So the market is growing quite rapidly but another competitor coming in changes the mix a little bit. And you don't really know how things are going to settle down. So it's an interesting environment. And it's good to have -- in the current environment, it's good to have the flexibility on capital that we do have by having a bit stronger balance sheet. So I mean, it's best if you can avoid having too many pressors or [indiscernible] bonds in the balance sheet is always helpful, because you keep the equity still we going in more strongly and that's quite important. The response is very important because it's got a large amount of common units and really that's probably been the strategy behind what's driving the policy of a stable state environment. We haven't added a lot of ships to the MLP in the last two to three years that's been good in one way, because it hasn't been the equity out that even build don't want to put into midstream, understandably. But on the other hand for us, it can be quite frustrating because we haven't grown in scale, which would have allowed the normal pattern of an MLP. And so it's a little bit of a trap. I mean, investors are contrarian at the moment. They want to see growth, they just don't want to see it now and they don't want to be for equity now but they want to see this in the future. So as you know yourself, it must be very difficult running a firm today midstream. It's not a best place to be. But I mean, I think, this shows where we are as a solid company.

But as you mentioned, the consistency of the long-term results have been good and that should be were something over time. Are you comfortable with team strategy going forward with your replacement here?

Yes, I mean, I think it's a safe. I don't really know the guy to be honest. I think the nice thing is he's got good back ground within NYK, which shows and luckily very committed to the MLP and that's very good, that side of it.

And never running or hedging, are they going to be remaining in place. The people that are actually -- the hedge trading and things to keep the balance sheet…

Yes, I mean, opportunistically. I mean, obviously, it's not so cheap now to hedges it was when we did those hedges. We would like to keep between about 50% to 70% of the interest charge hedge because I mean you try to match up when you fix the charters with the interest rates at the time. So obviously, it makes sense to produce a stable income at the level of hedging but you look at it today and it's not what it was in terms of pricing and it's come off a lot, admittedly this quarter as you can see from our losses on our portfolio, but we generally just ignore the day-to-day movements and we just try and take it opportunistically we have done in the past, and it's been good. I mean, the last two years, obviously, hedging has not always been a great story.

But they're stabilized now and we won't see too much more of the wage increases on the lifetime?

No, I think you're right and I'm just hoping to stabilize, but not much fun either way, whether you buy hedge or not today, I think the game is over, isn't it?

This concludes our question-and-answer session. I would like to turn the conference back over to John Costain for any closing remarks.

Okay, thank you. I just have to say thanks for all your interest and time on this call, and it's been interesting asking some, answering some of the questions you put forward and I'll speak to one last time -- next time and hopefully, some of you got there by the end. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.