Good morning and welcome to the KNOT Offshore Partners Third Quarter 2019 Earnings Results 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 now like to turn the conference over to Gary Chapman. Please go ahead, sir.

Thank you, Ben. Thank you. Welcome, everybody. The earnings release and slide presentation are both available on our Investor Relations section of our website. On today's call, our review will include non-U.S. GAAP measures such as distributable cash flow and adjusted earnings before interest, tax, depreciation and amortization, the EBITDA. Earnings release includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Please be reminded that any forward-looking statements made during today's call are subject to risks and uncertainties and these are discussed in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from those forward-looking statements and the Partnership does not undertake a duty to update any forward-looking statements. Just by way of a recap, KNOT Offshore Partners, KNOP, focuses on the shuttle tanker segment, whereby our ships transport oil from production units to shore side, effectively a mobile pipeline business and they form an integral part of the supply chain. Our sponsor Knutsen NYK has placed all of their younger assets in the MLP and all have long-term charters after construction. The MLP and sponsor combined are the largest operator of shuttle tankers with 29 vessels on the water, together with two FSOs and today three more shuttle tankers on order. Our sponsor has been involved in the design, construction and operation of shuttle tankers for well over 30 years, and so we believe our expertise is unrivaled. Each new vessel is almost always built for an individual charter and importantly our ship charter contracts do not rely or depend on the volume of oil produced by field, nor on the short-term underlying oil price as we always fix with strong credit counterparties, and therefore KNOP is set up to provide a stable and steady source…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Greg Lewis with BTIG. Please go ahead, sir.

Yes. Thank you and good afternoon, and thank you for the slide on the outlook for Brazil. I guess, just broadly speaking, as we think about the FPSO market where it stands today in terms of new units hitting the market, whether that's in Brazil or elsewhere, any way we can kind of quantify that number? And as we think about those new FPSOs hitting the market, how should we be thinking about the appetite for these new units coming online. How should we be thinking about the appetite in terms of whether the customers are thinking about newbuilds or potentially even just recycling existing shuttle tankers on the market?

Yes. I mean, that's obviously an incredibly difficult question to answer.

Understood.

Every charterer is different. They've all got a different profile. They all operate in different fields that have different profiles. They've all got different appetites for doing operational things themselves, some like to pass a lot of that work outside to other people, and some of them like to control a lot of that internally. I'm probably not going to give you a very good answer, I think, but I think what we are seeing, if you step back up a little bit, and that's kind of what we tried to do with this Brazil slide is to really just show that, however, the utility companies and oil majors want to do it, and there are various ways. The demand for offtake and shuttle tankers in Brazil is looking strong. And particularly, you'll notice the pre-salts, which are the black dots on the graph, the predictions that we've got are very strong. So, I think it will be different for every customer of ours. It will be different for every field up to a point and obviously the geography and the title, the strength of tides and the depths of water, et cetera, all play a part. So, we think there will be room for everybody to do well out of the growth in Brazil, and we expect and very much hope that we will get our fair share of that.

So as I think about that, maybe bigger picture, as we look back and realizing that the FPSO market is looking to set to grow after kind of stalling out over a period of time, is it generally, maybe -- is it the kind of like, I guess, like a 50-50 split or is it -- is a more of a 50-50 split or more of, like a 80-20 split? Is that kind of not the right way to think about it?

I think you're asking me to sort of a -- now looking into the future there, I’m really not sure I can answer that question. I'll be honest with you. It's such a difficult thing to know how people are going. And I think whatever I say will be wrong.

Welcome to my world. Okay. And then, just as we think about the stability of the cash, I mean, clearly the company's dividend has been kind of, it's been an attractive steady dividend for a handful of years. I mean, at this point, as we think about it, the yield is probably a little bit on the high side pushing around 11%. And just thinking about that, does that limit really the appetite of KNOT to a kind of drop down assets? I mean, it almost looks like you maybe you're not getting rewarded that maybe the way you should be for the stability of your cash flows.

Yes. I think -- and I said this on the previous calls last quarter, I think the company does feel that a little bit, that's the reality. I think it's not pushing those in a particular direction really, because I think what we've got is a sort of financial issue, if you like. We've got a strong shuttle tanker market. We've got strong operations. We've got a good setup challenges to translate and access all of that through the financial markets through the MLP. Yes, it's disappointing, a little bit where our yield is. But then, you look at everybody else -- and pretty much everybody else in this space is in that position, and the company is much bigger than us. So, what we're not doing is focusing too heavily on the negatives, and we are very much trying to focus on the positives and sell what we believe is a really good story to investors. Some point in the market will turn, some point the energy will come back into a little bit more fashion, maybe investment will flow back in. But at this stage, it's causing us some difficulties to access and grow our business, but we're really trying not to focus on that in the message that we're giving to the market, because that's a problem for us to try to solve as best we can. But it's not affecting our strategy, if you see what I mean.

Our next question comes from [Philip Fithcold], Private Investor. Please go ahead, sir.

I'm just curious, how will the new IMO there 2020 fuel the regulation effect our vessels. Basically I understand, the fuel -- it could be using 3.5% solvents as of January 1st of next year. It should go down to 0.05%. Is there any expectation of additional expenses or if we can handle the lower sulfur? Thank you.

Yes. I mean, certainly the fleet can handle it for sure. Generally speaking, fuel is the cost of our charterer. It's not a cost for us. So, on the whole, we are not overly concerned. There are some vessels out there that run on LNG, which are much more expensive. But again, that would also get companies in charterer's out of it. But the simple answer to the question is that we, as the owner, are not overly concerned about that because, as a said, it’s a cost for our customer, our charterer.

Okay. So flows back to the customer. That's already built in.

Yes. It's a variable cost of operating the vessel and we charter the vessel, and it's up to the charterer to put the fuel in the tank, so to speak.

[Operator Instructions]. Our next question comes from Robert Silvera with R.E. Silvera Marine Surveyors. Please go ahead, sir.

The dropdown potential vessels with the new holes being designed to handle with their propulsion systems, scrubbers or some other methodology, the parent company. Now, they're going after for this three that could possibly become dropdowns.

At this point in time, I don't believe that they're putting any scrubber technology on the vessels. On the whole, it's a customer choice.

Yes, I realize that.

If for example, yes. So, I mean, if the customer wants some scrubber technology on their vessel, we would look to do it, but it would be that cost it would come back through the charter rate and the cost of the vessel. Is that answering your question?

Yes. And then, what you're telling me then is that they basically are designing these ancillary features. The customer is, rather than the parent company. I'm thinking of it in terms of what makes the ship more attractive...

Yes. It's always a balance because we are obviously concerned with the very long-term and making sure that we have a vessel that is attractive not just to the first initial charterer that may have it for five or 10 years, but actually is then subsequently attractive for the general market if we have to recharter it. So, we're not keen to be putting lots of bells and whistles on ships that are not necessary, but equally we have to strike the balance, because if we've got a customer that's going to take the vessel for five to 10 years and they want something and they're prepared to pay for it, then on the whole, we generally try to accommodate that.

Very good. We're very pleased as shareholders with your achieved distribution coverage ratio of 1.55 and with the way the business is running and the future at Brazil, et cetera. I wouldn't like to suggest that perhaps the company would consider designing the dividend rather than being a steady $0.52 every quarter to keep it tied to a 1.50 coverage ratio. So, as you achieve better coverage ratios in the future, that extra cash would go into the dividend and keep the coverage ratio at 1.5. We'd love to see you consider that. And I think that would affect the results of your good performance as far as the share price is concerned, when people see the possibilities of the rising dividend based on your overall performance, which has been so good for years now. And you'll get better rewarded for that. In the meantime, extra cash, I'd love to see you build it, go in the normal amortization of debt, but at the same time build cash for possible upcoming dropdowns and things like that, which would give us our money at a lower interest rate because we are cash rich, so to speak. That's something that we feel as shareholders. We would appreciate that kind of approach.

Yes. And thank you for that. It's a very good idea. And we try to think about all of these sorts of strategies and approaches. I think not just for KNOP but the MLP market generally had quite an easy ride between 2013 and 2015, '16, it was easy to raise common unit equity, less so today. And I think as a result of that, we and others are facing different choices today. So, we've been quite prudent with not increasing the distribution any further. We've been quite prudent in letting the coverage ratio build up. But we need to look after the company, and that also means coming out with a longer-term strategy as to how we can best please everybody, whether it's through growth, whether it's through distributions, whether it's through the message that we give to the market. So, your idea of fixing the coverage ratio, it's a good one and we'll throw it in the public with all the ideas that we've got for sure.

Good. The other thing I'm convinced of is, the absurd low interest rates that are in the world right now both non-domestic to U.S. and overseas as well. This is not going to last forever. And so, the stronger we are cash wise going into the future, the better off will be for our borrowing interest rates. Okay, that's all. I have to offer and thank you very much for taking an idea of 1.50 under consideration. And then, the marketplace knows that. I think respond to the potential that fixed $0.52 is not there. And so I think that's what's been hurting you, the fact that the marketplace as well, there are just only going to do $0.52. Yes, it’s good steady business and all of that, but there is no potential for growth and there is inflation in the world, small now but who knows what it will be later.

Yes.

But anyhow, we can change the perception of the company's attitude toward the dividend, even though basically we'll be paying pretty much exactly the same thing. Thank you, guys.

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

Okay. Thank you to everyone who has listened in. I just want to wish you a good day. And we look forward to speaking in the next quarter. Thank you very much.

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