Hello, everyone. And welcome to the KNOT Third Quarter 2022 Earnings Results Conference Call. My name is Charlie, and I'll be coordinating the call today [Operator Instructions]. I would now hand over to your host, Gary Chapman, Chief Executive Officer and CFO to begin. Gary, please go ahead.

Thank you, Charlie. Thank you, and welcome everybody to our third quarter 2022 earnings call. The earnings release and this presentation are also available on our Web site at knotoffshorepartners.com if you want to view them. Straight on Slide 2 which concerns the nature of today's presentation. In particular, the inclusion of forward-looking statements, which are made in good faith, but which contain risks and uncertainties, meaning, that actual results may be materially different. The Partnership does not have or undertake a duty to update such forward-looking statements. And for further information, please consult our annual and quarterly SEC filings. Today's presentation also includes certain non-US GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures. On to Slide 3, highlights of the third quarter and subsequent. We announced a cash distribution of $0.52 for the quarter for the 29th consecutive time at this level under our 1099 structure, and which was the 38th consecutive distribution made since the Partnership first listed. We run at 99.7% utilization for scheduled operations during the second quarter and 92.8% taking into account the scheduled drydockings of the Lena and Windsor Knutsen vessels. We completed the acquisition of the Synnøve Knutsen on July 1, 2022 to bring our fleet up to 18 vessels and at the same time adding a block of forward revenue and charter coverage as a result. And all five of our vessel drydocking scheduled in 2022 have been completed. In terms of charter developments, Knutsen NYK have taken each of their one month options on the Bodil Knutsen to date and have options to keep the vessel until June 2023. We signed the time charter for the Windsor Knutsen with Shell to commence in or around January 2023 for a one year…

[Operator Instructions] Our first question comes from Liam Burke of B. Riley.

Gary, I mean, obviously, you've got four vessels with limited chartering options. Your current liquidity position is what it is. Your coverage ratio is lower. And then you have to balance that against the long term charter opportunities as well as elevated asset values. How are you balancing your coverage ratio and how long do you think that you're going to have to go before your coverage ratio improves?

I think the board is always looking at the whole picture, just as you have described there in terms of all of those things. And I think, the outlook for us hasn't changed in terms of what we've been saying for several quarters now that the impact will depend on the signing of new charters at good rates, and that's what we were doing yesterday, it's what we're doing today and it's what we will be doing tomorrow. And I think, we're working really hard to get back to a sustainable position. Like we said, the coverage ratio is not where we want it to be and we're working really hard to get that back. And I think that's really, as you've said, you've pointed out the North Sea vessels that we've got there, and that's exactly why we're looking at every angle, including the conventional market, to the maximum extent we can to make sure that we can not only get through this but also look after the long term interest of the unitholders and get us back to a sustainable place.

So what are your options in the North Sea? I mean, I understand the truth, the conventional charter market is what it is. But if there's over capacity in the North Sea there is over capacity in the North Sea?

That's not to say that the vessels aren't doing anything at all. There is business there, perhaps it's less long term than we would like. But we're talking to all of our customers all of the time, and their requirements change often, daily, weekly. So I think for us, we're pushing as many buttons as we can and that's why we broadened our horizon to the conventional market as well. There are opportunities out there. I think, we've been guiding towards this sort of situation for a little while. The gaps are a little bit [narrow] now and we recognize that, which is perhaps what's coming through in the earnings release that we've put out. But the extent to that depends on what charters we can get. And I do think there is some business in the North Sea, it's not that there's no business. And with the conventional market as well and obviously, the rates in the conventional market at the moment are very positive, so that's very helpful for us. They could go higher. So I think the extent of the impact for us is yet to be seen. And I think we're doing all we can to get some good business for those ships that are open.

Our next question comes from Richard Diamond of Castlewood Capital.

Gary, I just want to say that mid to long term outlook for KNOP is really the best it's looked since coming public, and it's really short term challenges. And I know you and the board will take the right course for creating long term shareholder value. Earlier this morning, I listened to the Frontline call and they shared Q4 Suezmax rates, you know, again, short term charter at $65,000 a day with a three year time charters at $35,000 a day. So it looks, if you wanted to do voyages that rates are still strong, without asking for a dollar, let's say Suezmax rates went up to $80,000 a day. Would that be competitive for KNOP?

You've made some really good points there, particularly around the mid to long term, which we certainly would agree with. And it is the short term that's the challenge for us. I think the part of the reason why we've been a little bit raising the caveats about the conventional market is obviously around the fact that the utilization is a little bit unpredictable. Yes, you can sign up for a TC but at a lower rate. And playing in the market really does depend on utilization and to a degree, obviously, fuel and repositioning and ballast costs. So I think it's not so easy to come up with a rate that this would work and this one wouldn't. But I think what we can say is that certainly where the conventional market is today, it's really helpful for us and we are seriously looking at what we can achieve in that market. And I think given the volatility that we're seeing in the market, we don't know what's going to happen to rates, et cetera with what OPEC and Russia are going to do and the price cap beginning of December. There's a lot of things happening at the moment that make it very difficult to think that conventional tanker rates are going to come down in the in the short term, and that's very helpful for us. So, whilst we don't want to necessarily use our vessels in the conventional market, we would much rather be doing offshore loading activities. It does at least give us a realistic and viable chance to earn good money. And you're right, I can't give you a rate. But certainly, despite the caveats we've put, we do feel that it's a good opportunity for us to be able to secure some charters and some income for our vessels.

Would it change the -- let's say, you decided to charter, let's say, two vessels short term or move them to for sell. Do you think that psychologically, the North Sea charters would start to become concerned about the availability of capacity?

Yes, and certainly we've seen that already starting in 2024 for sure. And I think some of our customers must already be thinking that way, I think. And we're seeing that in Brazil even today for 2023. So I think that is very, very possible. We've seen a couple of vessels leaving the North Sea just recently I think. So again, the numbers are changing regularly. And I think we -- things are moving in the right direction for us. We're not seeing too many variables that are working against us at the moment, newbuild prices are high, certain vessels are leaving, the older vessels are perhaps leaving the market in ones and twos and things are being tied up. And certainly in Brazil, that is already the case. What we doing our best to do is to obviously work with the conditions that we've got in the North Sea and do our very best to sign new business for those vessels. But certainly, the underlying market and the conventional market at least is -- it's supporting us in those efforts, I think.

[Operator Instructions] Our next question comes from Jim Altschul of Aviation Advisory Service.

I guess, I got a couple of questions for you, please. First of all, with regard to your hedge accounting, because for the accounting that -- specifically the realized and unrealized gain on the derivative instruments, because I believe in the news release, you said that you're not using hedge accounting, and if I'm using the right word. There's a significant -- if you look on the income statement, there’s significant increase in the interest expense because of the increase in interest rates. But you also have a significant realized and unrealized gain on the derivatives, I mean the derivatives are all related to your interest rate risk, right? I mean you you’re not…

[Multiple Speakers] interest rate…

I mean, you don't have other kinds of derivatives like Baltic tanker futures or anything like that, your derivatives are all interest rate related. Correct?

Yes, they’re all -- the realized and unrealized gain -- there's a breakdown in the earnings release, and the majority of that relates to the valuation of the interest rate swap contracts that goes through the P&L each quarter, because we don't do hedge accounting.

So of that, that figure you have in there $12.37 million, how much of that relates to -- this quarter’s interest expense and how much of that can we assume can be offset against the current quarter’s interest expense, and I hope I'm phrasing this properly?

Well, they're two different things. I mean, the interest expense is the interest expense on our debt and then separately, we have interest rate swap contracts that offset some of that. So they're not actually legally the same thing, if you see what I mean. So I think Jim, if you want to, I'm happy to speak to you separately away from this call, if that's helpful to you, if you wanted to drop an email to the IR email address, I'm very happy to talk to you. If you want to get into the detail at some point on that.

Okay, I will understand it better. Next question. In the press release, you indicated that I guess a couple of the vessels which were redelivered, if that's the right word. They are currently on short term charter to I believe your sponsor, but at a somewhat lower rate. Can you give us an estimate of what the quarterly revenue impact of these lower rates will be on those particular vessels, how much have we should be…

Yes, we’ve traditionally not broken down our fleet by vessel for a number of different reasons, and I'm not going to do that here. And in particular, because that is a rate that is somewhat private between the company and its sponsor. However, those rates have been reviewed and checked by our independent conflicts committee as being appropriate rates, given the circumstances. And actually, we believe that it's positive for the business to have those charters in place, because the alternative, certainly, up until this period, the alternative was potentially no income at all for a period of time. So I think we don't generally break down our fleet in that respect and we tried to steer our investors away from looking at individual vessels and instead focusing on the total revenues.

Certainly, I don't want to press the point, but there's more than one vessel affected. I was looking for an aggregate impact on the quarterly revenues of the transition of these -- two or three vessels to the short term charters. Would you be able to give us that number?

I'm not going to give you a number on that, because I think, as I say, you'll just be able to -- there are two vessels, you'll just be able to take the number divided by two. So it will kind of lead me in the same direction.

And the final thing is, this isn't -- this is not a question actually. And I know this is not -- this is supposed to be Q&A, not pontificating. But I would put -- as an investor, I would like to put in my $0.02 and no pun intended. I urge all of you to be conservative in calculating, determining your next distributions. I mean, obviously, I enjoy getting a nice quarterly distribution from you every three months. But to me the most important thing is the long term strength of the balance sheet and the company. And as you well know, there are an awful lot of companies that created some major problems for themselves by paying dividends well in excess of what they could really afford, starting with General Electric and General Motors. So again, I would encourage you to be conservative when it comes to making your next decision regarding that distribution.

Yes, I appreciate that, Jim. And I've said before and on previous earnings call and I'm happy to say to them, we try to run this business on a conservative basis. We're generally not inclined to make rash decisions. We tried very hard to do the best for our unitholders and also making sure that we can access the benefits that we think are going to come in the good market that we see in the future. So I fully get your point.

[Operator Instructions] Our next question comes from [Avi Church], who is an individual investor.

Just wanted to have a quick question. Realistically, what are the chances of spending some of the cash on repurchasing shares on the open market?

We've never ruled that out. It's something that the board has always kept on the table. We've historically not done that, we've not gone down that route. We felt that the money has been better used and it makes more sense to keep that money in cash in the business. And obviously, that's a decision for the board rather than myself, so I won’t sort of pontificate on what the board might or might not decide to do in the future. But we haven't typically done that. And I think at the moment, with our outlook, I think the business probably needs the cash that it's got, and we're focused on getting all of the charters that we need at good rates. So that we're in a good sustainable position. So I think to answer your question, I don't think it's on the cards at the moment. But as I say, I won't speak on behalf of the board. But I think at the moment, that's probably not our priority.

I only asked because the coverage ratio is below one, that's the only reason.

[Operator Instructions] Our next question comes from Rob Silvera of R.E. Silvera & Associates Marine Surveyors.

Gary, very concerned about this last report that you put out for a number of reasons, not just the financial reasons, but what it seems to point to based on your past actions. And my first question is, what was your purpose of revealing all of the new and upcoming shuttle tankers of Knutsen NYK that maybe available in the future, why did you reveal all of those?

Yes, that slide has sort of been in our presentation, certainly, as long as I've been performing this role. And we always like to disclose what the sponsor has, because through the omnibus agreement, we have the ability to purchase those ships from the sponsor, at a point in the future, subject to all kinds of different things. But I think it's important that we disclose that information, so that people can understand where the future might be in terms of fleet growth for the business. So there's nothing sinister about, it's really just trying to be transparent.

Well, currently, with our current situations with expiring contracts and the need to employ the ships, the report is obviously very troubling to the market, because we've lost over year's worth of dividends in the price of the stock for today. As we speak, it's down at $11.66 down [237], so that's very discouraging. And I think based on your past, pardon my horsey throat, your past conference calls. On the last one, you had said that there were no new dropdowns coming that you contemplated and then this latest drop down, which came in July, comes as a surprise based on what you're telling people that is going to happen in the future. And that's also happened a few quarters back when you mentioned nothing about drop downs. And then right after the conference call within a week, there was a dropdown and you didn't tell us that that was coming or even contemplated at that point in time. And I think that kind of communication hurts.

Rob, the previous earnings call in August, the dropdown had already happened. It was effective 1st of July and the previous earnings call was in August…

I missed that one, it was the one before that you said it. So it was the call [Multiple Speakers] so forgive me…

But the dropdowns that we've done, certainly, recently have been using cash and debt and it basically internally financed. So we haven't had to dilute any of unitholders to in order to do that and in order to bring in those new revenue streams…

That I understand…

And we put out the KNOT vessels, which was your original point. So that people can see what those vessels might be. And we always are looking to drop vessels down at an appropriate time when we think we benefit from doing that. So [Multiple Speakers] certainly something that we want to do.

Yes. But at this point in time, when you're struggling to get new contracts to fill the ships we have, I think it does not serve a good purpose to imply that there maybe future dropdowns with the raising of interest rates and raising of the debt levels that we have, because this last one you paid cash and you assume the debt. And altogether, we paid $119 million for a ship that turned out that it was actually defective and had to be repaired, which is not something that looks good…

I think that's a little bit harsh, because all of vessels have troubles and they get fixed. And that's the same as your car, it’s the same as anything else. I mean, it wasn't [Multiple Speakers] a little bit of…

I know. But it troubles me to see a used vessel go for $119 million in total cost, that was troubling. Anyhow, I'm happy as a shareholders for many, many years now that we're going to in the near future do some more dropdowns with conditions as they are until we get good contracts for our vessels, because it's obvious you do not want to operate in the spot market even though rates are high. And I can understand why you don't want to, because you're really not designed to compete against the VLCCs or the Suezmaxs that are doing that every day. And so that's my feeling that…

Well, we do and we are happy to go into the conventional market. I mean, all of these things are not so simple as looking at a headline rates and saying, yes, we can get that. But there's no reticence from us about putting our vessels in the conventional tanker market if we think that's the best thing to do. And certainly…

What size do we come in at, what size are we classified as Suezmax…

Most of the North Sea are Aframax and then we've got the Bodil Knutsen, which is Suezmax.

I see. Okay. Well, that's my concern. I know you want to be conservative and I just, I really don't want to see us increase our debt and increase our dropdowns at this point in time until we have solidified our existing fleet. Because next year, like you say, we face another five dry dockings, which are very tough on earnings. So that's my input. Okay. Thank you, Gary.

We won't be doing any dropdowns unless it makes sense. So it's not that we grow, it's not a grow at all cost MLP…

How does it make sense? Can you explain to me how it makes sense in a time when interest rates have risen and will probably rise some more, and we have ships that are not contracted for that maybe open to having to go in the spot market? How is it contemplating a dropdown beneficial?

Well, because -- and I'm not saying we're going to do a dropdown. But the way that we think about the dropdown is whether or not by itself as a standalone ship does it make the MLP stronger, is it in the interest of everybody for us to take that when you look at the cash flows associated with that vessel. So if we pay X dollars for it, is it creating free cash flow for us by buying that vessel at that price with the debt that it has in the charter that it has. And also considering the fact that we will have to pay a certain amount of equity for it and that maybe generated through internal funds or debt. But as a project, as a vessel, it has to stand alone and be a good piece of business and that's accretive as to the Partnership, otherwise, obviously, we won't do it.

Well, that's good to hear. The thing that's really discouraging is the market's reaction to the current report, which is quite discouraging. Because see a whole year’s of dividends wiped out in the price of the stock. Okay, thank you. That's my input, Gary. Please consider that and have a nice holiday. And God bless you.

Thank you.

At this time, we currently have no further questions. So I’ll hand back over to Gary for any closing remarks.

Thank you everybody. And I wish everybody well for the holiday season if we don't speak to you, and thank you again for listening.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.