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Operator: Hello and welcome to the KNOT Fourth Quarter 2022 Earnings Results Conference Call. My name is Bailey, and I’ll be your moderator for today’s call. I would now like to pass the conference over to Gary Chapman, CEO and CFO. Gary, please go ahead.

Gary Chapman: Thank you and welcome everybody to our fourth quarter 2022 earnings call. The earnings release and this presentation are available on our website at knotoffshorepartners.com if you want to view them. Slide 2 gives guidance on the inclusion of forward-looking statements in today’s presentation, 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 any such forward-looking statements. And for further information, please consult our annual and quarterly SEC filings. Today’s presentation also includes certain non-U.S. GAAP measures and our earnings release includes a reconciliation of these to the most directly comparable GAAP measures.

On to slides 3 and 4 are highlights from the fourth quarter of 2022 and subsequent. We announced a cash distribution of $0.026 per common unit under a 1099 structure, which although reduced was the 29th consecutive distribution overall since the Partnership first listed in 2013. Our fleet in the fourth quarter operated with 96.1% for scheduled operations and 94.9% utilization taking into account scheduled drydocking as of the Carmen Knutsen. Since we last reported we’ve been busy. On November 29, 2022, Repsol Sinopec, the charterer of the Carmen Knutsen, confirmed its option to extend the existing time charter of the vessel by one further year. The vessel is now fixed until January 2024, with Repsol Sinopec holding options to extend the time charter by two further one-year periods.

And since the end of the fourth quarter, we’ve signed six new contracts or extensions, including a new 10-month contract with Altera for the Ingrid Knutsen contract extension, so the Tordis Knutsen and the Lena Knutsen and new contracts with our sponsor Knutsen NYK for the Bodil Knutsen, Hilda Knutsen and the Torill Knutsen. The three contracts with our sponsor were approved by the Partnership’s Independent Conflicts Committee and provide a level of certainty to the Partnership. And in respect of the Bodil Knutsen and the Ingrid Knutsen, these vessels are now contracted to at least fourth quarter of 2025 and 2026, respectively. In addition, during the fourth quarter or since three of our vessels, the Windsor Knutsen, the Torill Knutsen and the Ingrid Knutsen, have operated for at least some time in the spot market, either performing conventional tanker voyages or offshore loading voyages, and each has been able to generate a positive contribution from those activities.

The Windsor Knutsen was also successfully delivered to Shell on January 11, 2023, commencing on a fixed one year charter, which Shell also have an option to extend the charter by one further year. And then finally, we have agreed commercial terms for a new multiyear time charter contract for each of the Fortaleza Knutsen and Recife Knutsen with Transpetro, to commence directly upon expiration of the existing bareboat charters. We are now awaiting charters management approval, which we anticipate will follow shortly. The increased market activity in our main market, Brazil, continued in the fourth quarter and to date, we expect this will persist based on current market parameters and conditions. The North Sea time charter market where currently 4 of our 18 vessels operate remained subdued, taking longer to return to the predicted higher levels of oil production and shuttle tanker demand.

However, we have secured a level of income for all of these 4 vessels in 2023 with the Bodil Knutsen and the Ingrid Knutsen secured until the fourth quarter 2025 and 2026, respectively, as I mentioned. At December 31, 2022, the Partnership had $47.6 million in available liquidity, and the fleet had an average age of 8.7 years, with each vessel having an estimated useful life of 23 years. Slides 5 through 7 are summary of financial results. And as usual, I will just mention a few points. On slide 5, our revenues were strong in the fourth quarter and indeed there may be over $1 million more in loss of hire insurance to come, resulting from insurance claims for the Windsor Knutsen and the Synnøve Knutsen that under U.S. GAAP, we’re not allowed to recognize in the accounts as we’re not yet sure of the final amount.

Operating expenses were lower in the fourth quarter, largely reflecting higher bunker fuel costs in connection with multiple vessel dry docks in both the second and third quarters. Recalling that when time charter vessels are on hire, fuel is a cost for our customers, but these vessels are off-hire during their drydock. Crew, crew related costs and logistics remained somewhat elevated compared to historic averages ever since the COVID-19 pandemic and which level we believe is probably now the new normal as we move forward. As we have mentioned before, with a wide and geographically spread crew and supply base to draw upon, we believe we have some protection against the inflationary pressures that are occurring in many countries just now. However, this is something that we, like all companies, are keeping under close review.

Higher LIBOR, higher utilization of our revolving facilities and having an 18 vessel from July 1, 2022 have all increased interest expenses during 2022, and this trend continued in the fourth quarter. However, this has not had any impact on our continuing and scheduled debt repayments made during the year. At December 31, 2022, the Partnership’s net exposure to floating interest rate fluctuations was $372.5 million or 35% of our total interest bearing debt. In other words, 65% was fixed by interest rate swaps or effectively fixed by our two sale and leaseback financings. On slide 6, you can see our cash and cash equivalents balance at the end of the quarter of $47.6 million. And we are working on the upcoming debt refinancings, the first of which falls due in August 2023.

And to date, we have no reason to believe that they will not be refinanced on acceptable and similar terms and in good time prior to maturity. At present, we are not targeting to borrow more, that is we do not currently plan to increase our leverage on any of the facilities. On slide 7, you can see the overall adjusted EBITDA result for the fourth quarter was very solid, and indeed it was the highest achieved in 2022. Slide 8 is an update on our contracted revenue and charter portfolio. As before, we have covered many of the contractual updates already, and they are also set out in the earnings release. So, I won’t repeat them here, other than to say that we are pleased with the progress we have been able to make in the fourth quarter of 2022 and subsequent.

We are in a position where we have contract coverage for almost the whole of 2023 and several vessels are now under contract for much longer periods. It’s still a work-in-progress, but we have certainly made progress. Including contracts and extensions signed since December 31, 2022, we have remaining forward contracted revenue of $715 million. This figure excludes options but it does include contracts and extensions signed since December 31, 2022. And as we have agreed commercial terms, though we have not yet signed, we have included the anticipated charters on a bareboat basis for the Fortaleza Knutsen and Recife Knutsen. Of our term charters, these have 2.1 years remaining on average and charterers had options to extend these charters by further 2.2 years on average.

On slide 9, we are showing our contract coverage in a different way. This slide is not saying that utilization in the first quarter of 2023 will be 100%, but rather that for this quarter, there are not further outstanding days still to be covered by a charter contract. This slide perhaps most clearly demonstrates where our work and focus is needed to restore forward visibility of earnings, to which we have very frequently referred to in the past. Then on slide 10, we have the potential dropdown vessels held by our sponsor KNOP that the Partnership may choose to purchase in the future. It remains the Partnership’s target to acquire these vessels from the sponsor when suitable opportunities arrive. However, there is of course no guarantee that this will actually be possible.

Slide 11, we have included a similar slide in previous presentations, but we believe this remains a very valuable source of independent information that speaks to the future of shuttle tanker demand in Brazil. Indeed, the number of new FPSOs to be deployed in Brazil through to 2027 equates to approximately 50% of the world’s total FPSOs. And with a low carbon score and low marginal cost of oil production, we remain very positive with respect to the mid- to long-term outlook here. We have also included a further slide in the appendix to this presentation to give some more detail. On slide 12, as we have highlighted previously, despite the forecast growth in demand for shuttle tankers in the mid- and long-term, only a very small number of new shuttle tanker orders have been placed for deliveries in 2023, 2024 and 2025, constituting approximately 8% of current shuttle tankers in service.

Given this and with the main shipyards having very limited or no capacity due to containership and LNG carrier orders through 2025, the total order book for shuttle tankers is likely to remain very muted. Hence, we continue to expect that the market will meaningfully tighten, potentially to the point of shortage. There does remain some uncertainty around forecasting the specific timing of such market developments. Newbuild shuttle tanker prices indeed the prices of any new ship today remain elevated, up over 30% in the second half of 2021, as a result of tight shipyard capacity and higher input prices for steel and labor, all of which continues to help the competitiveness of our existing fleet. So, in summary for this quarter on slide 13, we had good utilization of 96.1% for scheduled operations.

We paid a quarterly distribution for the 39th consecutive quarters, albeit at a reduced level. And we have commenced discussions with lenders for our upcoming refinancings. And since December 31, 2022, we assigned six new charters and extensions, and agreed commercial terms for multiyear charters for two further vessels. Overall, we’ve made good progress and important progress towards restoring visibility of earnings and a sustainable path forward. And of course, there remains more to do. In the near-term, as always, our focus is on safe operations, both onboard and onshore and to take care of our crew whilst maintaining our high standards and utilization statistics. Our other main focus is on the refinancings due in 2023. And we are well underway with these processes and hope to be in a position to have each closed well in advance of each maturity date.

After the Carmen Knutsen drydock which is already completed, there remains four further scheduled drydock in 2023 to take place in Europe in which we are planning for. Three of these vessels are European based, so mobilization costs will be lower than for the Brazilian based vessels. And hopefully, it goes without saying that we are talking to our customers and proactively monitoring the market to ensure we can respond flexibly as charter or even spot opportunities arise. And on slide 14, we have just put this in here to promote our newly refreshed website. We’ve tried to add a little more background content on shuttle tankers, and we will try to continue to do so over time. And hopefully people will find it useful and provide an improved experience.

Thank you for listening and following this more formal part of the call. I’ll be very happy to answer any questions.

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Operator: Thank you. The first question today comes from the line of Liam Burke from B. Riley. Please go ahead. Your line is now open.

Liam Burke: Gary, a lot of your discussion on the market is Brazil. You have four vessels in the North Sea. If I look at the newbuilding schedule, that’s all slated for Brazil. Could you either give us color on the North Sea market, or does it make more sense to move capacity to Brazil?

Gary Chapman: Yes. The North Sea market, as we said, is a little bit soft and it’s still the overhang from the project delays that we’ve seen historically. In terms of moving vessels down to Brazil, we certainly haven’t ruled that out. The timing is everything. And we would obviously also incur not insignificant costs in moving the vessels down to Brazil. So, we would want to be really sure that if we did that it would be a successful move. And so, I come back to my first point that timing is everything there to do that. But it’s certainly something we haven’t ruled out.

Liam Burke: Okay. Obviously your contracting outlook looks a lot better with what you’ve done in the fourth quarter. Does that help in you negotiations for your debt refinancings?

Gary Chapman: Yes, absolutely, absolutely. We think we will be able to successfully close all of those anyway, regardless. But of course, all of our institutional lenders clearly are interested in us being a successful business. But yes, of course, it helps. But nonetheless, we were confident that we would be able to get all of these refinancings done on a timely basis regardless, but yes, of course, it helps.

Liam Burke: And that also includes the two revolvers that are up for renewal in — later in the year?

Gary Chapman: That’s correct. It includes those. Yes.

Operator: Our next question today comes from the line of Richard Diamond from Castlewood. Please go ahead. Your line is now open.

Richard Diamond: Gary, good morning. I want to commend you on the progress you’ve made since the beginning of the year. And I have a quick market question. Are charterers aware that today you have significant potential market. If

Gary Chapman: Sorry. Richard, I’m — very quiet.

Richard Diamond: Okay. Can you hear me?

Gary Chapman: That’s much better. Thank you. If you wouldn’t mind starting again.

Richard Diamond: Okay. One, I want to commend you on making a lot of progress. It’s not easy and hats off. Secondly, are charterers aware that you have or we have significant choices in the marketplace? If you were a conventional tanker company, you could charter out your vessels and your stock price would likely double. I understand our strategy and I buy into it. I’m just wondering if the charterers understand how vulnerable they are, if shuttle tankers leave for conventional shipping.

Gary Chapman: Yes. Richard, it’s a great point and a great question. And yes, absolutely, we’re very much aware of that. And we make sure our customers are aware of that, if they’re not already aware of it by their own analysis. I mean, certainly, our shuttle tankers are irreplaceable. So — and there are only so many of them and with the yards full up, supply isn’t going to suddenly increase in the next few years. So, I think it’s something that we’re — we continually press with our customers that perhaps they do need to take a close look at what’s going to be available when they need it. So — and I think we’ve seen a little bit of that with Equinor fixing some of the vessels, Windsor and Bodil for example in the North Sea, so Bodil. So I think there is a little bit of movement there. And I think we’re increasingly seeing that certainly in Brazil, for sure, for sure.

Richard Diamond: Thank you very much.

Gary Chapman: Thanks, Richard. I appreciate it.

Operator: The next question today comes from the line of Poe Fratt from Alliance Global Partners. Please go ahead. Your line is now open.

Poe Fratt: Good morning, Gary — or good afternoon to you. I had a couple of questions more on the micro level. Do you have the mix of operating days broken out by charter versus what days worked in the spot for voyage market? And then what — how many days were idle including the lots of hire days?

Gary Chapman: Yes. Of course, we’ve got all of that data. I think we obviously try to strike a balance in what we publish in terms of giving people enough to understand the business and to make good decisions, but not opening ourselves up too much in terms of our competitors and our customers. But certainly, we can take a look at that information if that going forward is something that is of interest to people as to whether or not we can publish some of that data in future quarters.

Poe Fratt: Yes. I guess, it’s less interesting from a standpoint of moving forward you are going to have all the ones that worked in the voyage or spot market in the fourth and first quarter to-date will be moving on to charters with Knutsen NYK. So, I was just trying to get a flavor for what happened in the fourth and the first. And to that end, can you highlight the decision to move those back to time charters with Knutsen NYK, and why you didn’t stick with the tanker market because of as the previous questioner said, the tanker market looks pretty good, but nonetheless, you are moving that capacity back into the shuttle market?

Gary Chapman: Yes. So, I think there is a few little points in there. But I think the Conflicts Committee had a look at it and what we’ve done is on an arm’s length basis. And I think the overall point is that it provides us with certainty, which I think is important for us at this point in time. Of course, we may look back with hindsight and realize that we could have perhaps got higher rates. We may look back and think we could — we’ve done well. But I think what we are trying to do is understand that certainty is valuable to KNOT right now in terms of coverage and cash flow. And also, as we suggested a little bit in the past as well, headline tanker rates don’t necessarily easily translate into cash in the bank. And also our vessels are heavier and will require a discount on that rate, when we do put them into the conventional market.

So, I think when you look at the objectives of what we are trying to do at this moment, I think the Board and the Conflicts Committee felt that this was the right balance to strike where these are relatively short-term arrangements. And in particular, the Hilda Knutsen is essentially on a rolling contract. So, we have one vessel that we can take away, or take back from KNOT, and if the market was to suddenly spike for a period of time, we would have some exposure there if we wanted to take that. So, I think overall, the Board just felt that the balance between certainty and what is achievable net at the end of the day that this was a the right balance for us to strike with the one vessel where we could move it around a little bit if the market moved very, very positively.

Poe Fratt: Okay. And when you look at the three that are under the time charter with Knutsen NYK, are all of those rates that same across the three shuttle tankers? And then, was there any change from the month to month, previous arrangement to the new arrangement where you’re essentially creating some certainty into the end of the year?

Gary Chapman: Yes. I think the process that we go through and the Board goes through and the Conflicts Committee goes through looks at the rate. And I think it’s an appropriate rate, once that analysis is being done. And I think the process involves looking at what the market is doing, what we think is achievable. And to a degree, information from KNOT side that we are able to access, which is not actually all of it, because clearly that’s KNOT’s business. But we’re able to make an assessment on those charter rates such that the Conflicts Committee and the Board get comfortable that it’s their fair arm’s length rates under the circumstances. So I think, clearly, whilst I’m not answering your question in numbers terms, the charter rates across the vessels are similar, they’re not wildly different. One isn’t double the other for example. They are very, very similar.

Poe Fratt: And then, I should mention, congratulations on closing some of the charter windows that you had. Can you just talk about the outlook for the other two bareboat charters in Brazil? One actually is, I think the Dan Cisne is up in June. Can you just talk about the Dan Sabia and Dan Cisne sort of your outlook there in your expectations? Will they also clip to time charters versus bareboats? And then, if you could also just expand on the difference, what we’re going to see from the standpoint of your income statement impact on the change from bareboat to time charter?

Gary Chapman: Yes. Well, certainly, the Fortaleza, Recife and the Cisne, Sabia, they’re two sets of two sister vessels. So, it makes sense that Transpetro or Petrobras are talking to us in these two pairs, rather than all four vessels at once, for example. And the Fortaleza, Recife have obviously come up first, and that’s why we’re talking to them about those. I think normally we would much prefer that we have these contracts signed earlier, and the same with the Cisne, Sabia as well. But we obviously can only go at the speed of our customer, and they have a lot of internal arrangements and things to sort out themselves. I think at the moment on the Cisne, Sabia, we will start those discussions with Petrobras, Transpetro, as soon as we finished with the Fortaleza and Recife, and that’s our current expectation. So, I’m afraid I’m not giving you too much information there, but we’re essentially having to follow our customers lead.

Poe Fratt: Okay. And then, when you look at sort of the time charters you have in place that start in January of 2024, can you just maybe give us some flavor for whether on the Tordis, the Lena, the Ingrid, as you move on to time charters with either Shell or Eni, what’s the change? Is it up, down or neutral? Just directionally, if you’d give us an idea of sort of how those rates as they kick in, in early 2024, look, relative to what the current environment is?

Gary Chapman: Yes. I mean, I think the rates on vessels are very much a factor of when those agreements were reached. And I think the net situation for 2024 for the vessels that you’ve mentioned there, I haven’t done the math, so you’re going to have to, I’m afraid, just bear with me. But my expectation would be that the rates on a net basis would probably be neutral, across all of those vessels.

Poe Fratt: And again, Gary, that’s relative to what they’re currently working at?

Gary Chapman: I think that’s a level of detail that I’m going to struggle to answer on the phone here, Poe.

Poe Fratt: Okay.

Gary Chapman: I think it’s — the rates, as I say, are a function of when the charterers were agreed, and certainly some of those charterers were agreed a while ago. So I think we’ve got some positive numbers in there. And we’ve got some numbers that are today perhaps not so positive. And therefore on a net basis, you’re perhaps looking at a neutral figure for 2024, for those vessels today. But obviously, if we’re fixing new charters for existing vessels, right now, those rates might be better, given the climate and the market, particularly in Brazil.

Poe Fratt: Okay. And should I read anything into — you’re not talking about DCF or distributable cash flow, do you have a figure for fourth quarter 2022? And is that something you’re going to be talking about going forward? Or I guess in the context of, if you are going to be talking about distributable cash flow in 2023, sort of what you would be using for your maintenance CapEx?

Gary Chapman: Yes. I think with the reduced distribution, we felt that it didn’t make a lot of sense to continue with it. And so, it’s really not a metric, we focused on it at Q4. Clearly it was helpful when people were monitoring the risk or the future outlook for the distribution. But I think we’ve reached the conclusion that perhaps it’s not so helpful going forward. And that’s really why we’ve not continued with it. We feel cash flow and liquidity is a clearer and more understandable position for our investors to look at.

Poe Fratt: Okay. So, in the event of any possible change in the distribution, you would be looking more to traditional payout ratios on earnings as opposed to distributable cash flow. Is that fair to say, or can you just sort of expand on that?

Gary Chapman: I think, unfortunately, we cut the distribution, but it was only in January. So, that’s not at the moment something that we’ve focused on looking at. I’m not saying that the DCR and DCF would never come back, or what else we might do in its place. But yes, I think right now, Poe, I don’t really have an answer to that.

Poe Fratt: Okay. Just if I could squeeze one last one in. There is a lot of turmoil — there is obviously a lot of turmoil in the financial industry right now. Can you just talk about your interest rate hedges and when they roll? You have 65% of your debt currently hedged or fixed, and those don’t last forever. Can you just give us sort of an aging on the interest rate swaps and when they roll?

Gary Chapman: Yes. I don’t have that information. We will be putting out our 20-F very shortly. And I suspect all of that data will be in there. Is that something that you can wait for, Poe?

Poe Fratt: Oh, absolutely. No, I was just wondering — I mean, my — as I recall, I think there are three-year tenures or maybe they are remaining like 2.5, 3 years left on them, as I recall

Gary Chapman: Yes. There is a real mixture. And typically, they follow the debt profiles typically, but not always. But I think the best thing to do, if you are not urgently waiting for that information, is to get our 20-F, and I suspect you will find it in there.

Poe Fratt: Great. Thanks for your help, Gary.

Gary Chapman: No problem. Thank you very much.

Operator: Next question today comes from the line of . Please go ahead. Your line is now open.

Unidentified Analyst: Hi. Good morning. Thank you. And Gary, my question was along the similar vein related to the interest expense, right? Do we find the hedging that we are doing by of way these derivatives, is that as effective as was anticipated? Clearly, the interest expense right now is our biggest exposure and kind of keeping on target with the profit. So, I just wanted to understand if you had any other clarity beyond the additional detail you’d be providing later.

Gary Chapman: Yes. I mean, we’ve always taken the view throughout the history of this business that it’s prudent to hedge a good proportion of our floating debt. And by taking on to effectively fixed term sale and leaseback transactions, that’s also helped the percentage that is effectively fixed. I think, we haven’t entered into new swaps recently because of the rising interest rate environment. I think a lot of those forward pricing has already been factored in, and so the swaps were not so attractive. So I think we may see some of our coverage percentage wise for over time. But it’s something we keep under constant review. If there is an opportunity and we feel it’s the right thing to do, then are opportunities for us to enter into new hedges.

I think the Board mandates and gives management some leeway, so we can act quickly on this within certain parameters, because obviously, if you wait too long, you kind of miss the boat. But it’s something that we’ve constantly got under review. And like most of the companies, interest rate increases are not particularly welcome after low interest rates for so long. But we’ve only got 35% open today. So, we’re not in a bad position.

Operator: There are no additional questions waiting at this time. So, I’d like to pass the call back to Gary Chapman for any closing remarks. Please go ahead.

Gary Chapman: Yes. Thank you everybody for listening. And we’ll hopefully be back in touch for our first quarter in May. Have a good day.

Operator: This concludes today’s conference call. Thank you all for your participation. You may now disconnect your line.