Knot Offshore Partners LP (KNOP) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the KNOT Offshore Partners LP first quarter conference call. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. John Costain. 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 discounted cash flow, DCF, and adjusted EBITDA. The earnings release includes a reconciliation of these non-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.

And now onto the presentation. KNOT Offshore Partners, KNOP, focuses on the shuttle tanker segment. These assets provide a vital service, transporting oil from the offshore oil production units to shore side, in essence a midstream mobile pipeline business. The vessels are an integral part of the logistics supply chain, operating in a space which will see substantial oil production growth in the coming years. Shuttle tankers are built to charterers' requirements and used on specific fields. They attract contracts which give long-term, non-volume-based revenue streams.

Whilst the MLP has a young fleet, our sponsor has been involved in design and construction of these type of vessels for over 30 years, building up the fleets organically during this period. And today, the Knutsen Group has more than 30 of these high-specification tankers.

In our niche sector, there has been no speculative ordering, so the partnership should yield both stable and sustainable revenues longer term. Before ordering a new vessel, our sponsor, Knutsen NYK, has always agreed a long-term employment contract with the charterer.

Following on from the recent acquisitions of Raquel Knutsen in Q4 2016 and Tordis in Q1 2017, we are pleased to announce another addition to the MLP fleet, the Vigdis Knutsen, for an acquisition price of $147 million. This will occur in June 2017. The vessel was delivered in February 2017 and commenced a 5-year charter to Royal Dutch Shell in April 2017. As well as being an accretive acquisition, the vessel has a time charter duration of 5 years plus 10 further years of options, increasing our MLP charter backlog and reducing the age of the fleet -- average age, sorry.

KNOP trades at significant yield premium to Alerian today. Our distribution is over 9% compared to the Alerian Index of around 7%. The index represents around 87 -- 85% of all MLPs by market cap. Our sponsor, Knutsen NYK, is according to Clarkson's 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 2013, just after the IPO, we had a fleet of 4 vessels with an average age of 3.25 years. In the space of 4 short years, the fleet will have grown 225% to 13 vessels with an average age of about 4.25 years at the end of June. Despite disruption in the capital markets, we continue to grow at a rate significantly in excess of most MLPs.

Now turning to the presentation. Slide 3, highlights of an eventful first quarter. The partnership generated total revenues of $45 million, operating income of $17.5 million and net income of $11.4 million, generated adjusted EBITDA of $33.2 million and distributable cash flow of $15.6 million. The fleet operated with 98.6% utilization for scheduled operations, including insurance receipts, which accounted for 2.5%; and 93.2% utilization, taking into account all off-hire, including the planned dry-dock of the Windsor Knutsen, which was completed in 54.1 days.

On the 10th of January 2017, the partnership sold 2.5 million common units in a public offering, raising total net proceeds of $54.9 million.

On the 2nd of February 2017, the partnership issued and sold a private placement convertible preferred units for USD 50 million.

On the 1st of March 2017, the partnership completed the acquisition of the entity that owns the Tordis Knutsen.

On March 30, 2017 (sic) [March 31, 2017], the partnership entered into a loan agreement for a refinancing of the credit facility secured by the Hilda Knutsen.

May 15, 2017, the partnership paid a cash distribution of $0.52 per common unit with respect to Q1. With a distributable cash flow of $16.6 million, we made a record $17 million distribution payment with the recently issued common and preference units included. Since our initial IPO over 4 years ago, we have now declared and paid common unit distributions of $7.7, so our initial investors have received a total return of 37%. Our current yield is a stable distribution of over 9%.

On May 16, 2017, the partnership entered into a share purchase agreement with a company that owns the shuttle tanker Vigdis Knutsen from Knutsen NYK Offshore Tankers, Knutsen NYK.

Slide 4, raising additional $40 million of preferred equity to fund further growth in the partnership. As I said previously, on February 2, 2017, the partnership issued and sold a private placement of [2.08 Series A] convertible preferred units -- Series A preferred units at a unit price of $24 per unit. A private placement of $50 million, the net proceeds from the sale after expenses was about $48.6 million.

On May 16, we reached an agreement for a further private placement to sell an additional 1.667 million Series A units. This is expected to close by 30th of June 2017 with net sale proceeds of around $38.8 million. Subscribers of the instruments are large international funds located in 3 different continents. The $40 million allows the partnership to consider an additional drop-down in the second half of 2017 on top of the 2 drop-downs which have already been announced. This is one additional vessel compared to our financial guidance at Investor Day. And although it makes our balance sheet a bit more complex, the preference issue enables us to raise equity at running cost of 8%, so allowing KNOP to continue to grow through accretive acquisitions. There are no preemptive rights, which are quite common in such agreements, to the detriment of the issuer. The issue is evidence that KNOP is proactive in finding other sources of capital at accretive terms when constrained by the equity markets.

The private preferred perpetual convertible equity instrument, as I said previously, carries a fixed coupon of 8%, which is not -- while this is not subject to adjustments and is convertible to common equity after 2 years and adjustable strike price, the adjustment being dependent upon the development in the book value of the partnership. The original strike price is at a level of $24.

Slide 5, the income statement. Total revenues of $45 million for the 3 months ended March 31, 2017, Q1, compared to $45 million for the 3 months ended December 31, Q4. Q1 revenues were positively affected by the time charter earnings of Raquel Knutsen and Tordis Knutsen being included with the results of operations from 1st of December 2016 and 1st of March 2017, respectively. The increase is offset by reduced revenues from Windsor Knutsen as a result of a scheduled dry-dock during the third quarter. This was completed in 54 days.

In addition, due to a technical fault with its controllable pitch propeller, the Raquel Knutsen went off-hire during the first quarter, which resulted in a loss of hire insurance claim. The 14-day deductible for off-hire under the related insurance policy also adversely affected revenues during the first quarter. We insure all our fleet for loss of hire. This helps maintain the stability and predictability of our MLP earnings. When an event occurred which causes off-hire switches with the Raquel Knutsen, revenue loss during scheduled off-hire is minimized. In 4 years of operation, this is the first loss of hire claim we have made.

Vessel operating expenses for the first quarter of 2017 were $10.3 million, an increase of $2.6 million from the fourth quarter of 2016. The increase was mainly due to Raquel Knutsen and Tordis Knutsen being included in the fleet commencing 1st December and 1st of March, respectively. In the vessel operating expenses for the first quarter, $0.6 million relates to bunkers consumption in connection with the dry-docking of Windsor Knutsen and $0.6 million is related to the repair of Raquel Knutsen, which is expected to be recovered by insurance less a deductible of $150,000.

General and administrative expenses were increased $0.3 million from the fourth quarter of 2016 to $1.5 million. The increase primarily reflects the effect of additional activity in connection with the year-end accounts. As a result, operating income for the first quarter of 2017 was $17.5 million compared to $20.6 million (sic) [$21.6 million] in the fourth quarter of 2017 -- '16, sorry.

Interest expense for Q1 was $6.2 million compared to $5.7 million for Q4. The increase was mainly due to the additional debt incurred with the acquisition of both Windsor -- sorry, Raquel and Tordis Knutsen.

Realized and unrealized gain on derivative instruments was $0.5 million in Q1 compared to $4 million in Q4. The unrealized noncash element of the mark-to-market gain was $1.3 million compared to $4.5 million in Q4. Of the unrealized gain in Q1, $1.1 million related to mark-to-market gains on the interest rate swaps due to an increase in the interest rate -- swap rate during the quarter and unrealized gain of [$0.2 million] related to foreign currency contracts due to a slightly stronger U.S. dollar against Norwegian kroner.

As a result, net income for Q1 was $11.4 million compared to -- $11.4 million for Q1 compared to $19.5 million for Q4.

Slide 6, adjusted EBITDA. Adjusted EBITDA reflects the earnings before interest, taxation, depreciation and amortization. It provides a proxy for cash flow. Adjusted EBITDA, of course, is a non-U. S. GAAP measure used by our investors to measure the partnership performance. In general, since the formation of KNOT, we have a very high levels of vessel utilization, on average around 9.5% for scheduled operations. Financially, this translates into continually high and increased predictable revenue and adjusted EBITDA as more vessels are added to the fleet. This will continue and be more pronounced from Q2 when Windsor, Raquel and Tordis all should trade for a full quarter and the Vigdis will be added to the fleet.

In Q1, the partnership generated adjusted EBITDA of $33.2 million compared to $36.1 million in Q4. The EBITDA fell by $2.9 million compared to Q4. This was impacted by the fall occurred. G&A and OpEx were more expensive by USD 450,000. We also had an increase in OpEx, mostly due to Windsor bunkers consumed ballasting to dry dock of $600,000.

There were 2 less days in Q1. All Q1 figures generally are poorer than the rest of the year. This affects slightly the partnership by $800,000. The Windsor dry-docking accounts for 51 days of off-hire. That's USD 3.1 million. The Raquel 14-days loss of hire excess was $700,000; Raquel hull and machinery deductible, further $150,000; and the timing difference on the Raquel outstanding hull and machinery payment, a further $500,000. This had a negative impact of $6.3 million on the EBITDA. Countering this was the Raquel full quarter income compared to 1 quarter in Q4 -- sorry, 1 month in Q4. This had an impact, positive of $2 million. And the Tordis was, at March, added $1.4 million to EBITDA. So overall, $6.3 million minus $3.4 million gives you $2.9 million movement.

At the end of Q1, the KNOP fleet of 12 vessels has an average age of 4.6 years compared to the rest of the industry average for shuttle tankers, excluding KNOP of around 12 years. With a wasting asset like a vessel, the younger fleets, in theory, should produce lower EBITDA to every dollar invested. The annuity effect reduces the value lost from the earlier years, which is factored into the replacement CapEx calculation for distributable cash flow.

Slide 7 focus on the Windsor Knutsen special survey, which went according to plan. The Windsor went through its special second survey, which is the 10-year one in dry dock at Brest yard in France. CapEx and OpEx were in line with budget, and the docking was completed on schedule. Off-hire in relation to the special survey was completed in 54.1 days because the vessel undertook lengthy ballast legs from Brazil to France and back. The vessel is back on hire under its Shell time charter on -- from the 4th of April.

Slide 8, we have a comprehensive insurance package for all our vessels. In the first quarter, our fleet operated with 96% utilization for scheduled operations. Of the 4% unscheduled off-hire, 3.9% relates to Windsor -- sorry, the Raquel Knutsen technical fault. We insure our fleet for loss of hire to minimize the impact on MLP earnings when an event occurs which causes off-hire. Consequently, 2.5% of this time, 4% loss is recoverable under our insurance policies. In 4 years of operation, this was the first loss of hire claim we had made. The insurance has helped smooth and stabilize our fleet earnings. In order to mitigate the economic costs of any incident which can result in damage and/or loss of hire, the partnership has put in place a comprehensive insurance package with a diverse group of investment-grade insurance companies, the large majority of which are rated A or better by S&P and A.M. Best company.

The failure of the controllable pitch propeller, CPP, of the Raquel Knutsen with resulting off-hire in relation to repair and ballast is therefore expected to result in an economic loss in total of $0.85 million for the partnership, $0.7 million in loss of hire and $0.15 million in hull and machinery excess.

Insurance recoveries are accounted for when they are probable of defeat. In our case, the confirmation of payment from the insurer has been used. We are still accruing costs in building the claim, so inevitably, there are timing differences. And at this stage, the insurance company cannot confirm they will recover all losses less the deductible of USD 150,000. These timing differences adversely affect the first quarter results by 1/3 of USD 570,000. The sponsor, and by extension, the partnership has good experience and a history that indicates the insurance company will pay the amount close to the total cost. Bareboat charterers undertake to fully insure the vessel they lease from us at their own costs in order to protect us from any economic loss.

Our time charter vessels generally have the following policies: hull and machinery covers a loss of or damage to the vessel due to marine perils such as collisions, grounding and the weather; protection and indemnity indemnifies against liabilities incurred while the vessel -- including injuries to crew and third parties, cargo loss, property damage and pollution; war risk covers loss of damage to the vessel due to war perils, including total loss and damage, collision, liability and hull interest and freight interest; loss of hire, in excess of 14 days and up to 180 days per incident.

Slide 9, distributable cash flow, another non-U. S. GAAP measure to estimate distribution sustainability. Today, we report quarterly distributable cash flow of $15.6 million in Q4. This compares to our highest ever -- sorry, Q1. This compares to our highest ever $20.8 million in Q4. We maintain our distribution level for Q1 of $0.52 per unit, equivalent to an annual distribution of $2.08. The distribution coverage ratio for this quarter is 0.95. The coverage ratio has reduced primarily due to the equity being raised before assets are dropped into the MLP, effective what we call an equity overhang. The common unit, we raised $54.9 million in January; and the preference unit, $48.6 million in February issues were made in the first quarter. The preference unit of $38.8 million will be in the second quarter and used to finance -- help to finance the Tordis on the 1st of February and Vigdis on early June.

The outlook for the second quarter is considerably better. There are no off-hires on -- and should be no off-hires in any of the vessels in this quarter. The Raquel, the Windsor, the Tordis will all be on hire for the fourth quarter, and the Vigdis Knutsen will enter the fleet towards the end of the quarter.

The MLP has an elevated yield compared to most MLPs, and therefore, we have rather focused on firstly building coverage and then deleveraging, rather than increasing dividend as there is little benefit to the MLP short term paying a yield of much over 9%. We have raised funds of between $21 and $29 per unit. And many of our common unit holders have remained loyal, so we would not want to dilute them. We see double-digit distributions as a signal that investors would rather prefer increased coverage through investment, and secondly, deleveraging rather than increasing dividends. That said, we had a coverage ratio of 0.95% (sic) [0.95x] in Q1, even with both the equity overhang and vessel off-hires. And potentially, there is room for increasing the distribution, but this is something the Board of Directors have to consider.

Next slide, the balance sheet. At the end of Q1, we had a solid liquidity position with cash and cash equivalents of [$34.9] million and an ongoing undrawn credit facility of around [$30] million. The credit facility is available until June '19. Following on from both preference and common issuances we acquired with Tordis Knutsen and repaid the seller credit, and most of the revolving credit facility has been fully repaid. Our treasury position is therefore very comfortable. And with additional preference issue, $40 million; the Hilda refinancing proceeds, around $24 million; the potential use of the revolver facility, $30 million; and a seller credit of $25 million, these hopefully can be utilized to acquire further vessel in addition to Vigdis before the end of 2017 to further grow the MLP.

We have a predictable cash flow, and we do not have any loan maturities before the second half of 2018. This will soon be materially improved with the refinancing of Hilda, our first balloon repayment due. The total interest-bearing debt outstanding was $781 million. This has increased due to the acquisition of Raquel Knutsen. Annually, we currently have scheduled repayment of $58.9 million. This compares to replacement and maintenance CapEx charge of around $32 million. And when computing distributable cash flow, this accounts for the current cover generated.

Slide 11, pending, the Vigdis drop-down. We announced the latest addition to the MLP fleet, the Vigdis Knutsen, for an acquisition price of $147 million effective from June 2017. Built by Hyundai Heavy Industries in Korea and delivered in February 2017, the Vigdis is sister to the Tordis Knutsen. It is a Suezmax-class enhanced DP2 shuttle tanker, operating under a time charter that expires in the second quarter of 2022 with Royal Dutch Shell in Brazil. There are options to extend until 2032. We have agreed with our sponsor, Knutsen NYK, to acquire the vessel for the MLP for $147 million with delivery effective from June 2017. It will be part financed by commercial debt of around $95 million and also cash from the new equity. The senior loan has a margin of 190 basis points with annual repayment under $5.1 million. The net charter rate will yield around $7.7 million of net income with approximately $16.2 million of EBITDA for the first year from 2017 June.

The charter has an escalator of around $600 per day applicable annually. That's $0.2 million on the EBITDA. With this acquisition, it again demonstrates our sponsor's strong support of and commitment to the MLP. Our fleet will have grown 225% since the IPO in April 2013.

Slide -- next slide, our contracts are fixed price, not fixed to price of oil. The extreme movements of the Alerian Index and to a larger extent, the KNOP unit price, due to market volatility, which we saw in 2015 and 2016, have receded. And with them, the oil price correlation to our unit price that had occurred has also become less pronounced. Throughout this period, the volatility in the unit price in no way reflected or affected the underlying performance of the MLP. All our contracts are long-term, non-volume based with a fixed price. Therefore, our vessels all achieve a fixed income per day. These contracts are all with the end user of the asset, which is an integral part of the logistics supply chain. And without these efforts, the oil will not flow.

Next slide, a stable and long-term sustainable distribution policy. Since our initial IPO offering 4 years ago, the KNOP yield -- unit yield has remained elevated to the Alerian for most of that period. The unit has prices significantly up from the Alerian. And with the high yield, this has produced a stable investment and a significant ownership premium.

During this period, our investment distribution has increased by 49%. Our average distribution coverage ratio has grown -- has been around 1.18x. And through releveraging, we have been able to plow much of this back into the MLP to enhance fleet growth. Q1 was primarily affected by equity overhang as there was a delay in investing proceeds from equity offerings. Commercially, we have also been affected by the scheduled dry-docking of Windsor and Raquel off-hire. The impact of the Raquel off-hire we expect to reduce as the full claim is negotiated. In calculating the DCF in Q1 2017, the coupon on the preferred equity has been deducted before the available DCF is computed as it is purely a common unit distribution sustainability metric.

The Hilda refinancing marks the start of refinancing activity. On the 30th of March 2017, the partnership completed the refinancing of the Hilda Knutsen. The new senior secured credit facility consists of $100 million term loan with Mitsubishi, and this is a fixed tenure of 7 years. Closing the facility is anticipated towards the end of May 2017. The Hilda refinancing will remove the next balloon repayment due, and this was in August 2018. At the same time, we will raise an additional $24 million and reduce the loan margin by 30 basis points. The cost of the facility is 1%. The facility is repayable in 28 consecutive quarterly installments with a balloon payment of $58.5 million at maturity. The facility will bear interest at a rate per annum equal to LIBOR plus a margin of 2.2%. The next balloon payment is [the sister ship] in October 2018. As we roll through these refinance, we should be able to use the additional funding to raise further growth, grow it in the investment base.

Long-term contracts backed by leading energy companies. Our fleet has an average remaining contract duration of 4.8 years with an additional 3.6 years coverage, on average, in charterers' option. The Windsor Knutsen has been on a 2-year contract from October 2015 with Brazil shipping, a subsidiary of Royal Dutch Shell. There are further 6 years of extension options that has just gone back on hire following this dry docking in Brest.

The Bodil Knutsen, which is our largest shuttle tanker operating in the North Sea, is ice class and on charter to Statoil ASA until May 2019. There are 5 further years of extension options. Statoil has recently been given permission to proceed with the development of Johan Castberg Field in the Barents Sea, and this should provide medium-term employment and security for Bodil.

Four of our vessels are on long-term bareboat charter to 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 for Repsol Sinopec until 2023.

The Ingrid Knutsen was delivered in December 2013 and is operating in the North Sea on time charter to Standard Marine Tønsberg, a Norwegian subsidiary of ExxonMobil. This will expire in the first quarter of 2024 with charterer's options to extend up to 5 years.

The Raquel Knutsen was delivered in March 2015 and is operating on a time charter which expires in 2025 with Repsol Sinopec in Brazil. There are again options to extend to 2030.

Tordis is on a 5-year time charter to Brazil Shipping, a subsidiary of Shell. This will expire in the first quarter of 2022 with the charterer's option to extend up to a maximum of 10 further years. Sister ship of Tordis, the Vigdis Knutsen is on similar terms to Shell with expiring charter in the second quarter of 2022.

Slide 16, significant growth since the IPO. With the latest addition, which again demonstrates our sponsor's strong support of and commitment to the MLP, we have already added 8, soon to be 9, vessels to the fleet, a 225% increase in 4 years. Our drop-down inventory to date includes 2 further potential acquisitions. There are currently 2 more shuttle tankers, and we can acquire them from our sponsor, Knutsen NYK: one sister vessel to Tordis and Vigdis, Lena Knutsen, which is launched -- which is on the water now and is chartered to Shell -- will be chartered to Shell; and one Suezmax class DP2 shuttle tanker from COSCO Zhoushan to be chartered to Petrogal. Both currently have 5-year contracts attached and an average of 8 years of options. Our recent acquisitions, Raquel, Tordis and Vigdis, and all our drop-down inventory will operate in the pre-salt oil field in Brazil.

Slide -- in summary then, KNOT Offshore Partners is, in essence, a midstream of our pipeline business with fully contracted revenue streams. Since being awarded its first 2 contracts in 1984, Knutsen has grown organically for over 30 years as the business has been built into a sizable 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 around 4.25 years. The fleet has delivered another steady quarter, taking into account the scheduled dry docking of Windsor and the off-hire related to Raquel Knutsen. We have completed the acquisition of Tordis and Vigdis and -- sorry, completed the acquisitions of Tordis and have entered into a share purchase agreement for the acquisition of Vigdis Knutsen. We have raised $145 million of new equity, in addition to $100 million worth of long-term debt in the quarter, which is being utilized for growth acquisitions. And no one has more experience in operating a sophisticated shuttle tanker than Knutsen Offshore, and we operate these assets with real expertise.

Today, supply is timing, and the market is expanding. And with tenders back, the sponsor expects to build a further drop-down inventory. We have a supportive sponsor who has a large asset base with which to build the MLP, and we'll capture a good proportion, we believe, of the expanding market. Coupled with this, we remain an attractive value proposition with quarterly distribution of $0.52 per unit, around 9.2% yield.

Thank you, and I'll turn it over to Q&A now.

(Operator Instructions) Our first question today comes from Spiro Dounis from UBS Securities.

Just wanted to ask first about the refinancing activity. Looks like a pretty big cash-positive event on the Hilda Knutsen. I think $24 million is what you mentioned, and then it looks like you've got another 2 more in the hopper there between Torill and Ingrid. As we think about how much cash you can extract out of those refinancings, can you give us a sense of where that is and then what you plan to do with that cash flow, whether it's later this year or in '18?

Well, obviously, we were very happy with the Hilda refinancing, and we were looking to raise, to do something similar on the Torill. But obviously, we haven't. This is the biggest bilateral deal that Mitsubishi have done in shipping, so we're very pleased with the refinancing. There aren't -- I don't know if any of the banks out there would do something quite as big as that bilaterally. So obviously, doing the next deal would be more complicated, and we'll have to put together a syndicate of some sort. But obviously, the sponsor is looking at raising more capital on the Torill, and the idea would be to use that to acquire another vessel if we can raise further financing on that. We might -- we can certainly drop a third vessel in the way things are looking now, and we'd probably look to leverage up and basically grow the cover, so -- and the MLP through leverage. So -- but at this stage, it's the early stages of talking to people. We've got -- it's 2 or 3 months down the line from the Hilda, and we still got a good 15 months before we have to start worrying about. And we're not under any pressure now because the amount of capital we've raised recently.

Yes. So you mentioned potentially linking up refinancing and your cash inflows with doing a third drop. I guess I got the sense before that you sort of listed all your sources of liquidity. Should we assume that if you do that third drop this year, it's not really contingent upon much in the way of raising additional capital? It sounds like you've already got it. Or should we connect these refinancings with doing a third drop?

Well, we...

It's Øystein, Spiro. And also just mentioning on the refinancing. So of course, the Hilda and Torill, they were financed by a syndicate of banks. And now we've taken out one of the vessel and just finance it bilaterally with Mitsubishi. So we are thinking of doing something very similar for Torill, but we have to take this step-wise. When it comes to the Ingrid loan, it's actually a fairly small portion of the loan, which is maturing end of 2018. The Ingrid loan is actually what you would call an ECA loan, so where the Norwegian government is lending us a big portion of that loan and where some commercial banks have a loan attached to that. So the ECA facility doesn't mature before 2025 actually for Ingrid but only the commercial terms, and so that should be no problem refinancing. But there's no really rush to do it since the vessel is on charter to 2025. So I think we are very confident about fitting in place a similar refinancing at Hilda. And of course, we are in the market talking to banks. We have very good access to debt finance. And kind of the liquidity question, we have no means that we -- when we are saying that we have balance sheet capacity to add another vessel in third quarter, it means that we have that secured today, ability to do (inaudible) through this preferred equity issuance, which will take place on 30th of June.

Okay. And that answers my question. It's kind of what I was getting at from the balance sheet capacity standpoint. Just second question here, just along the drop-down inventory. You've got 2 left. One sounds like maybe it could happen this year, which leaves one more for '18. Can you give us a sense for how quickly the sponsor can replenish the drop-down fleet? And at one point, do you go out to the market and make third-party acquisitions? Is that still years away in your view?

No, not necessarily. Obviously, from placing an order, winning a tender to construction, completion is about 2 years. So we may make a third-party acquisition or we might just wait a year or 2. We're certainly quite relaxed now. We've got this growth out of the way, and we feel there's plenty of interest out there, and new tankers, I think, are starting to show. But we haven't had -- it doesn't translate into any tenders yet. We're still -- the Statoil contracts haven't been awarded yet. We're still involved with that. Obviously, we're not the only partner involved with it, so participant involved with it, so we can't say whether we'll see that or not. And going forward, I think we'll start to see quite a few oil majors asking about shuttle tankers, so we're relatively relaxed about it. Obviously, we can't grow in a very stable, steady way because it depends on what contracts we win, but we think we're extremely well placed to win quite a lot of these tenders that are going to come out.

Our next question comes from Hillary Cacanando from Wells Fargo.

I just had a question about the Windsor Knutsen charter. I know that's expiring in October this year. Just wanted to find out if you've been in discussions with Shell for an extension or with any other charterers for employment?

We haven't. They have a 6-month declaration window, so -- is it 6 or 3, Øystein, actually this...

It's 3 months. So they will declare in July whether they want to continue with it. Of course, the income of this is guaranteed by the sponsor until April 2018. But we are in talk with Shell, so they will inform us in July whether they will use the first option to extend the charter.

I see. So until July, you're not allowed to talk to any other charterers?

No. They have, of course, the right to exercise the option. But the market for shuttle tankers are already tight these days, so we are not losing sleep about it.

Okay. And then just on Hilda Knutsen and Torill Knutsen expiring in 2018. I know it's kind of early. Are you in discussions at all? Or is it still too early?

Again, (inaudible) the agreements -- we can refinance the ships, so we're not under any pressure to push them to exercise the renewal. I mean, the good thing about those 2 ships is they're really, really specialized. I mean, you just can't replace them without -- you have to construct new vessels, and it's going to take 2.5 to 3 years. So I mean, any -- I'm thinking along those lines anyway, we have a good relationship with them, and we're pretty confident that it will just roll to the new agreement. Now if we...

Who...

Sorry?

Who owns the third -- I think last time you had mentioned that there's the Hilda Knutsen, Torill and then there's another shuttle tanker serving the Goliat Field. Who's the third one?

American Eagle.

American Eagle. Okay, got it.

It's [the vessel] Eagle Barents. There are 3 vessels in the world which can load oil long distance, particular FPSO. And these are Hilda, Torill and Eagle Barents, so substitution risk is 0.

Okay. And then you mentioned different tenders during the call. And I think last -- either last call or the call before, you said there were tenders for more than 40 vessels up to 2020. Was just wondering if that has changed at all. Has that gone up or down? Is it still 40 vessels?

Well, that's [Bernie's] projection. We've never said that, but we do think it's a pretty good start. I mean, what I would say is that when you see the way the vessels trade, the -- in the pre-salt, the Petrobras voyage is pretty straight in and out Brazil, but the international oil companies tend to do longer voyages. And when I look to the [ASA] stakes or an investment day, we saw that like the Shell and Petrogal and all these sort of ships were doing between 8 and 10 charters a year. And the Petrobras was doing around 28 to 30 voyages a year. They're really shuttling basically, whereas there's more destination flexibility with the international companies. And obviously in recent years, Exxon basically started to talk to Petrobras now about licensing part of the pre-salt, which is all very positive. And that's the last major, oil major that hasn't been in the zone, actually taking -- looking to take a slice of the pre-salt. And as that happens, then I think you'll see an increase in demand for shuttles. I mean, the good thing about having a lot of the oil majors involved is that they all tend to like to use their own ships, and they also tend to like to have destination flexibility on the discharge, which tends to increase demand for shuttles. So -- but we see at the moment, we've not seen translated yet into firm orders. I mean, the markets are being quite volatile in the shipping space, and the offshore has been a bit subdued. So we -- it's not translated yet into firm orders, but we see it's definitely -- interest is definitely there, and we do think that we'll -- you'll see some activity fairly soon.

Okay. Just -- I just have a one quick follow-up question. The 3 shuttle tankers that are serving the -- that has the capacity to serve the Goliat Field, do you know if there are any other, like a new build that are under construction that would have this capacity, or no?

Well, the 2 ships...

Like a special...

There are 4 new buildings -- 4 vessels on order. 3 of them are from Teekay. They will go to Canada. They can offload on Goliat, and the fourth one is Lena Knutsen, which will go on charter to Shell. So all these vessels are tied up on long-term charters.

(Operator Instructions) Our next question comes from Ben Brownlow from Raymond James.

Just 2 quick ones, near term, kind of thinking around second quarter. The Windsor, the incremental bunker costs that you had, around $600,000 in the first quarter, is there any incremental bunker costs related to that dry docking that will fall into the second quarter?

No, it's pretty clean in the second quarter. It's back on hire on the 4th of April. So the cost has been (inaudible) quarter.

Okay, great. And just one more for me. The Raquel repair cost, that $600,000. I guess roughly $400,000 is going to be reimbursed by insurance. Any idea on the timing of that?

Both in the second quarter. It will come out in the second quarter, but it depends how quickly they [bill] the file. I think it'll be certainly before the end of the year, should be the second quarter really.

(Operator Instructions) Our next question comes from Nick Raza from Citi.

Just a couple of quick follow-on questions about the bunker fields. Isn't the IMO mandate that states that a lot of the marine vessels are supposed to reduce sulfur emissions very drastically by 2020? Can you just talk about what the impact of that is on your fleet?

We tend to burn -- we can burn more sulfur fuel on marine diesel oil, I guess. We're not in U.S. loading areas, really, so it doesn't really affect us too much.

And it's also -- just also have to highlight the fact that when you have a vessel on time charter, the cost of bunkers is for the charter account, so we don't pay the bunker's cost. So the charter is obligated to find out and pay for the bunker, so it's not kind of a cost for us. And usually, we burn marine gas oil. And so this is more an issue for what I would call commodity shipping like conventional tankers or cruise operators or container vessels.

Okay, so not much of an impact. Then I guess the other sort of question I have was, I mean, during the Analyst Day, I mean, you guys did a great job of presenting some of your parents assets, and your parent has a fairly large portfolio of LNG vessels. Is the thought for the MLP to continue to be pure-play oil? Or is -- at some point in time, do you expect that you can actually drop down some of the LNG vessels or your backlog could increase and incorporate LNG vessels as well?

I cannot answer from the sponsor side. As long as there are lots of shuttle tankers there, along with (inaudible) reason for kind of mixing it up because we don't even -- we don't want this to be a [non-quote] MLP. But the thing is we see a lot of tender activity this year, so we do expect that we will add to the drop-down inventory during the year. If the vessel -- if we kind of drop down assets very quickly, of course the LNG could be a potential asset class since the charterers are the same. Shell is the biggest charterer on the LNG as well. And basically, LNG is a floating pipeline similar to the shuttle tankers. But so far, we have not contemplated doing it.

Okay, okay. And then I guess just turning to the financing a little bit more. I mean, you mentioned that you would not increase the distribution right now because there's sort of an equity overhang and you'd rather pay down debt. But at what point do you think or at what level do you think that might change, understanding that the market still may not give you credit, but any thoughts on that?

We guided -- at Investor Day, we guided we might raise by [1%] at the end of the year, but we're not ---- I mean, it's not our decision, obviously neither Øystein's or mine. But we will look at -- we will propose, depending on what the unit price goes to as well. Ultimately, we would like to -- if unit price does go up significantly, we'd like to defend it. But when you're up in 9.25% yield you sort of think, well, I mean, we've got all these investments to make. [Which is sorting all that's built to cover] because it doesn't make sense. I mean, I think a normalized MLP should have a distribution increase of 2% to 4% a year in a normal environment, and that's what we probably try and aim for. But today, we're a bit more relaxed about it because we think we offer very good value and we have a very good growth story and we have a good yield, so we're quite relaxed about distribution increases. So not desperate and try to push it.

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.

I'd just like to thank everyone who attended for attending, and I hope you found the information we disclosed valuable.

If you want any more information, please feel free to e-mail me or Øystein. My contact details are on the website, and thank you for attending.

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