Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 6-K

 


 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

Commission File Number: 001-35866

 


 

KNOT OFFSHORE PARTNERS LP

(Translation of registrant’s name into English)

 


 

2 Queen’s Cross,

Aberdeen, Aberdeenshire

AB15 4YB

United Kingdom

(Address of principal executive office)

 


 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F  x                    Form 40-F   o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes  o                     No  x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes  o                     No  x

 

 

 


Table of Contents

 

KNOT OFFSHORE PARTNERS LP

 

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

 

Table of Contents

 

 

Page

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018

3

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018

4

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

5

 

 

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital for the Three and Six Months Ended June 30, 2019 and 2018

6

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

7

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

Forward-Looking Statements

40

 

 

Exhibits

42

 

 

Signature

43

 

THIS REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO THE FOLLOWING REGISTRATION STATEMENTS:

 

·                  FORM F-3 (NO. 333-218254) ORIGINALLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) ON MAY 26, 2017; AND

·                  FORM F-3 (NO. 333-227942) ORIGINALLY FILED WITH THE SEC ON OCTOBER 23, 2018.

 

2


Table of Contents

 

Unaudited Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2019 and 2018

(U.S. Dollars in thousands, except per unit amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Operating revenues: (Notes 3, 4 and 13)

 

 

 

 

 

 

 

 

 

Time charter and bareboat revenues

 

$

70,908

 

$

69,221

 

$

141,456

 

$

136,608

 

Loss of hire insurance recoveries

 

 

450

 

 

450

 

Other income

 

14

 

94

 

15

 

750

 

Total revenues

 

70,922

 

69,765

 

141,471

 

137,808

 

Operating expenses: (Note 4 and 13)

 

 

 

 

 

 

 

 

 

Vessel operating expenses

 

15,301

 

13,974

 

29,757

 

27,221

 

Depreciation

 

22,429

 

22,332

 

44,860

 

43,906

 

General and administrative expenses

 

1,264

 

1,350

 

2,561

 

2,695

 

Total operating expenses

 

38,994

 

37,656

 

77,178

 

73,822

 

Operating income

 

31,928

 

32,109

 

64,293

 

63,986

 

Finance income (expense): (Note 13):

 

 

 

 

 

 

 

 

 

Interest income

 

233

 

161

 

471

 

296

 

Interest expense (Note 6)

 

(13,186

)

(12,526

)

(26,844

)

(23,119

)

Other finance expense (Note 6)

 

(286

)

(288

)

(404

)

(626

)

Realized and unrealized gain (loss) on derivative instruments (Note 7)

 

(10,318

)

1,968

 

(16,247

)

11,944

 

Net gain (loss) on foreign currency transactions

 

(192

)

260

 

(218

)

(70

)

Total finance expense

 

(23,749

)

(10,425

)

(43,242

)

(11,575

)

Income before income taxes

 

8,179

 

21,684

 

21,051

 

52,411

 

Income tax (expense) (Note 9)

 

(3

)

(3

)

(6

)

(6

)

Net income

 

$

8,176

 

$

21,681

 

$

21,045

 

$

52,405

 

Series A Preferred unitholders’ interest in net income

 

$

1,800

 

$

1,800

 

$

3,600

 

$

3,600

 

General Partner’s interest in net income

 

118

 

367

 

322

 

901

 

Limited Partners’ interest in net income

 

6,258

 

19,514

 

17,123

 

47,904

 

Earnings per unit (Basic): (Note 15)

 

 

 

 

 

 

 

 

 

Common unit (basic)

 

$

0.191

 

$

0.597

 

$

0.524

 

$

1.465

 

General Partner unit (basic)

 

$

0.191

 

$

0.597

 

$

0.524

 

$

1.465

 

Earnings per unit (Diluted): (Note 15)

 

 

 

 

 

 

 

 

 

Common unit (diluted)

 

$

0.191

 

$

0.585

 

$

0.524

 

$

1.415

 

General Partner unit (diluted)

 

$

0.191

 

$

0.597

 

$

0.524

 

$

1.465

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

3


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Unaudited Condensed Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2019 and 2018

(U.S. Dollars in thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net income

 

$

8,176

 

$

21,681

 

$

21,045

 

$

52,405

 

Other comprehensive income, net of tax

 

 

 

 

 

Comprehensive income

 

$

8,176

 

$

21,681

 

$

21,045

 

$

52,405

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

4


Table of Contents

 

Unaudited Condensed Consolidated Balance Sheets

As of June 30, 2019, and December 31, 2018

(U.S. Dollars in thousands)

 

 

 

At June 30,
2019

 

At December 31,
2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents (Note 8)

 

$

42,429

 

$

41,712

 

Amounts due from related parties (Note 13)

 

1,504

 

1,141

 

Inventories

 

2,439

 

2,443

 

Derivative assets (Notes 7 and 8)

 

1,981

 

4,621

 

Other current assets

 

2,537

 

2,462

 

Total current assets

 

50,890

 

52,379

 

 

 

 

 

 

 

Long-term assets:

 

 

 

 

 

Vessels, net of accumulated depreciation (Note 10)

 

1,722,151

 

1,767,080

 

Right-of-use assets (Note 4)

 

2,075

 

 

Intangible assets, net (Note 11)

 

1,589

 

1,891

 

Derivative assets (Notes 7 and 8)

 

914

 

11,667

 

Accrued income

 

4,374

 

3,807

 

Total long term assets

 

1,731,103

 

1,784,445

 

Total assets

 

$

1,781,993

 

$

1,836,824

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable (Note 13)

 

$

2,981

 

$

4,800

 

Accrued expenses

 

6,293

 

6,464

 

Current portion of long-term debt (Notes 8 and 12)

 

83,285

 

106,926

 

Current lease liabilities (Note 4)

 

558

 

 

Current portion of derivative liabilities (Notes 7 and 8)

 

426

 

1,740

 

Income taxes payable

 

18

 

130

 

Current portion of contract liabilities

 

1,518

 

1,518

 

Prepaid charter

 

6,891

 

5,771

 

Amount due to related parties (Note 13)

 

1,189

 

1,070

 

Total current liabilities

 

103,159

 

128,419

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt (Notes 8 and 12)

 

953,680

 

970,365

 

Lease liabilities (Note 4)

 

1,516

 

 

Derivative liabilities (Notes 7 and 8)

 

5,314

 

345

 

Contract liabilities

 

4,445

 

5,203

 

Deferred tax liabilities (Note 9)

 

463

 

453

 

Total long-term liabilities

 

965,418

 

976,366

 

Total liabilities

 

1,068,577

 

1,104,785

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Series A Convertible Preferred Units

 

89,264

 

89,264

 

Equity:

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Common unitholders

 

612,965

 

631,244

 

General partner interest

 

11,187

 

11,531

 

Total partners’ capital

 

624,152

 

642,775

 

Total liabilities and equity

 

$

1,781,993

 

$

1,836,824

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

5


Table of Contents

 

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital

for the Three and Six Months Ended June 30, 2018 and 2019

(U.S. Dollars in thousands)

 

 

 

Partners’ Capital

 

Accumulated Other

 

 

 

Series A

 

(U.S. Dollars in thousands)

 

Common
Units

 

General Partner
Units

 

Comprehensive
Income

 

Total Partners’
Capital

 

Convertible
Preferred Units

 

Three Months Ended June 30, 2018 and 2019

 

 

 

 

 

 

 

 

 

 

 

Consolidated balance at March 31, 2018

 

$

639,156

 

$

11,680

 

$

 

$

650,836

 

$

89,264

 

Net income

 

19,514

 

367

 

 

19,881

 

1,800

 

Other comprehensive income

 

 

 

 

 

 

Cash distributions

 

(17,701

)

(333

)

 

(18,034

)

(1,800

)

Net proceeds from issuance of common units

 

 

 

 

 

 

Consolidated balance at June 30, 2018

 

$

640,969

 

$

11,714

 

$

 

$

652,683

 

$

89,264

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated balance at March 31, 2019

 

$

624,408

 

$

11,402

 

$

 

$

635,810

 

$

89,264

 

Net income

 

6,258

 

118

 

 

6,376

 

1,800

 

Other comprehensive income

 

 

 

 

 

 

Cash distributions

 

(17,701

)

(333

)

 

(18,034

)

(1,800

)

Consolidated balance at June 30, 2019

 

$

612,965

 

$

11,187

 

$

 

$

624,152

 

$

89,264

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018 and 2019

 

 

 

 

 

 

 

 

 

 

 

Consolidated balance at December 31, 2017

 

$

628,471

 

$

11,479

 

$

 

$

639,950

 

$

89,264

 

Net income

 

47,904

 

901

 

 

48,805

 

3,600

 

Other comprehensive income

 

 

 

 

 

 

Cash distributions

 

(35,402

)

(666

)

 

(36,068

)

(3,600

)

Net proceeds from issuance of common units

 

(4

)

 

 

(4

)

 

Consolidated balance at June 30, 2018

 

$

640,969

 

$

11,714

 

$

 

$

652,683

 

$

89,264

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated balance at December 31, 2018

 

$

631,244

 

$

11,531

 

$

 

$

642,775

 

$

89,264

 

Net income

 

17,123

 

322

 

 

17,445

 

3,600

 

Other comprehensive income

 

 

 

 

 

 

Cash distributions

 

(35,402

)

(666

)

 

(36,068

)

(3,600

)

Consolidated balance at June 30, 2019

 

$

612,965

 

$

11,187

 

$

 

$

624,152

 

$

89,264

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

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Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(U.S. Dollars in thousands)

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

21,045

 

$

52,405

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

44,860

 

43,906

 

Amortization of contract intangibles / liabilities

 

(456

)

(456

)

Amortization of deferred revenue

 

 

(743

)

Amortization of deferred debt issuance cost

 

1,314

 

1,271

 

Drydocking expenditure

 

69

 

(3,803

)

Income tax expense

 

6

 

6

 

Income taxes paid

 

(121

)

(172

)

Unrealized (gain) loss on derivative instruments

 

17,047

 

(11,253

)

Unrealized (gain) loss on foreign currency transactions

 

30

 

(44

)

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in amounts due from related parties

 

(363

)

(290

)

Decrease (increase) in inventories

 

4

 

4

 

Decrease (increase) in other current assets

 

(71

)

3,516

 

Decrease (increase) in accrued revenue

 

(567

)

(884

)

Increase (decrease) in trade accounts payable

 

(1,843

)

(1,222

)

Increase (decrease) in accrued expenses

 

(173

)

(656

)

Increase (decrease) prepaid charter

 

1,121

 

449

 

Increase (decrease) in amounts due to related parties

 

119

 

(3,800

)

Net cash provided by operating activities

 

82,021

 

78,234

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Disposals (additions) to vessel and equipment

 

 

(10

)

Acquisition of Anna Knutsen (net of cash acquired)

 

 

(15,376

)

Net cash (used in) investing activities

 

 

(15,386

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from long-term debt

 

 

145,500

 

Repayment of long-term debt

 

(41,661

)

(146,002

)

Repayment of long-term debt from related parties

 

 

(22,535

)

Payment of debt issuance cost

 

21

 

(1,114

)

Cash distributions

 

(39,668

)

(39,668

)

Net proceeds from issuance of common units

 

 

(4

)

Net cash (used in) financing activities

 

(81,308

)

(63,823

)

Effect of exchange rate changes on cash

 

4

 

(45

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

717

 

(1,019

)

Cash and cash equivalents at the beginning of the period

 

41,712

 

46,104

 

Cash and cash equivalents at the end of the period

 

$

42,429

 

$

45,085

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

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Notes to Unaudited Condensed Consolidated Financial Statements

 

1) Description of Business

 

KNOT Offshore Partners LP (the “Partnership”) was formed as a limited partnership under the laws of the Republic of the Marshall Islands. The Partnership was formed for the purpose of acquiring 100% ownership interests in four shuttle tankers owned by Knutsen NYK Offshore Tankers AS (“KNOT”) in connection with the Partnership’s initial public offering of its common units (the “IPO”), which was completed on April 15, 2013.

 

Pursuant to the Partnership’s Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), KNOT Offshore Partners GP LLC, a wholly owned subsidiary of KNOT, and the general partner of the Partnership (the “General Partner”), has irrevocably delegated to the Partnership’s board of directors the power to oversee and direct the operations of, manage and determine the strategies and policies of the Partnership. During the period from the Partnership’s IPO until the time of the Partnership’s first annual general meeting (“AGM”) on June 25, 2013, the General Partner retained the sole power to appoint, remove and replace all members of the Partnership’s board of directors. From the first AGM, four of the seven board members became electable by the common unitholders and accordingly, from this date, KNOT, as the owner of the General Partner, no longer retained the power to control the Partnership’s board of directors and, hence, the Partnership. As a result, the Partnership is no longer considered to be under common control with KNOT and as a consequence, the Partnership accounts for acquisitions of businesses and assets under the purchase method of accounting and not as transfers of equity interests between entities under common control. All acquisitions have been consolidated into the Partnership’s results as of the date of acquisition. Please read Note 2—Summary of Significant Accounting Policies and Note 16—Acquisitions.

 

As of June 30, 2019, the Partnership had a fleet of sixteen shuttle tankers, the Windsor Knutsen, the Bodil Knutsen, the Recife Knutsen, the Fortaleza Knutsen, the Carmen Knutsen, the Hilda Knutsen, the Torill Knutsen, the Dan Cisne, the Dan Sabia, the Ingrid Knutsen, the Raquel Knutsen, the Tordis Knutsen, the Vigdis Knutsen, the Lena Knutsen, the Brasil Knutsen and the Anna Knutsen, each referred to as a “Vessel” and, collectively, as the “Vessels”. The Vessels operate under fixed long-term charter contracts to charterers, with expiration dates between 2019 and 2025. Please see Note 4—Operating Leases.

 

The consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern.

 

The Partnership expects that its primary future sources of funds will be available cash, cash from operations, borrowings under any new loan agreements and the proceeds of any equity financings. The Partnership believes that these sources of funds (assuming the current rates earned from existing charters) will be sufficient to cover operational cash outflows and ongoing obligations under the Partnership’s financing commitments to pay loan interest and make scheduled loan repayments and to make distributions on its outstanding units. Accordingly, as of August 28, 2019, the Partnership believes that its current resources, including the undrawn portion of its revolving credit facilities of $28.7 million, are sufficient to meet working capital requirements for its current business for at least the next twelve months.

 

2) Summary of Significant Accounting Policies

 

(a) Basis of Preparation

 

The accompanying unaudited condensed consolidated interim financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of management of the Partnership, all adjustments considered necessary for a fair presentation, which are of normal recurring nature, have been included. All intercompany balances and transactions are eliminated. The unaudited condensed consolidated financial statements do not include all the disclosures and information required for a complete set of annual financial statements; and, therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2018, which are included in the Partnership’s Annual Report on Form 20-F (the “2018 20-F”).

 

(b) Significant Accounting Policies

 

Except as described below under (c)  Recent Accounting Pronouncements - Adoption of new accounting standards ”, the accounting policies adopted in the preparation of the unaudited condensed consolidated interim financial statements are consistent with those followed in the preparation of the Partnership’s audited consolidated financial statements for the year ended December 31, 2018, as contained in the Partnership’s 2018 20-F.

 

(c) Recent Accounting Pronouncements

 

Adoption of new accounting standards

 

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, Leases (ASC 842), that amends the accounting guidance on leases for both lessors and lessees. On January 1, 2019, the Partnership adopted the new standard using the optional transition method to apply the new standard at the transition date of January 1, 2019 with no retrospective adjustments to prior periods. Consequently, the accounting and disclosures for the prior periods continue to be presented in accordance with the previous standard for leases.

 

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Table of Contents

 

The Partnership elected the package of practical expedients and has not reassessed whether any expired or existing contracts are, or contain leases, not reassessed lease classifications, and not reassessed initial direct costs for any existing leases. Additionally, the practical expedient of disregarding short-term leases for agreements with lease terms of 12 months or less as a lessee was adopted as an accounting policy for all underlying assets.

 

The Partnership’s time charter contracts include both a lease component, consisting of the lease of the vessel, and non-lease component, consisting of operation of the vessel for the customers. The Partnership has elected to use the practical expedient to not separate the non-lease component from the lease component for all such charters where the lease component is classified as an operating lease, and account for the combined components as an operating lease. Consequently, there were no changes to the timing or amount of revenue recognized, and therefore, no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessor accounting. Additional qualitative and quantitative disclosures are required and have been implemented for reporting periods beginning as of January 1, 2019, while prior periods are not adjusted and continue to be reported under the previous accounting standards. See Note 4—Operating Leases. The Partnership does not have any material leased assets.

 

Adoption of the new standard resulted in recording a right-of-use asset and a lease liability on the consolidated balance sheet for operating leases of $2.3 million and $2.3 million, respectively, as of January 1, 2019. There was no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessee accounting. As of June 30, 2019, the right-of-use asset and lease liability for operating leases was $2.1 million and $2.1 million, respectively, and are presented in separate lines on the balance sheets. See Note 4—Operating Leases.

 

Accounting pronouncements to be adopted

 

Recently issued accounting pronouncements are not expected to materially impact the Partnership.

 

3) Segment Information

 

The Partnership has not presented segment information as it considers its operations to occur in one reportable segment, the shuttle tanker market. As of June 30, 2018 and 2019, the Partnership’s fleet consisted of sixteen vessels and operated under twelve time charters and four bareboat charters. Under the time charters and bareboat charters, the charterer, not the Partnership, controls the choice of which trading areas the applicable Vessel will serve. Accordingly, the Partnership’s management, including the chief operating decision makers, does not evaluate performance according to geographical region.

 

The following table presents consolidated revenues and percentages of revenues for customers that accounted for more than 10% of the Partnership’s consolidated revenues during the three and six months ended June 30, 2019 and 2018. All of these customers are subsidiaries of major international oil companies.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Eni Trading and Shipping S.p.A.

 

$

11,134

 

16

%

$

11,555

 

17

%

$

22,146

 

16

%

$

22,936

 

17

%

Fronape International Company, a subsidiary of Petrobras Transporte S.A.

 

11,249

 

16

%

11,248

 

16

%

22,378

 

16

%

22,378

 

16

%

Repsol Sinopec Brasil, S.A., a subsidiary of Repsol Sinopec Brasil, B.V.

 

9,282

 

13

%

9,283

 

13

%

18,463

 

13

%

18,222

 

13

%

Brazil Shipping I Limited, a subsidiary of Royal Dutch Shell

 

20,606

 

29

%

20,399

 

29

%

40,889

 

29

%

40,572

 

30

%

Galp Sinopec Brasil Services B.V.

 

8,881

 

13

%

6,438

 

9

%

17,584

 

12

%

12,071

 

9

%

 

4) Operating Leases

 

Revenues

 

The Partnership’s primary source of revenues is chartering its shuttle tankers to its customers. The Partnership uses two types of contracts, time charter contracts and bareboat charter contracts. The Partnership’s time-charter contracts include both a lease component, consisting of the lease of the vessel, and non-lease component, consisting of operation of the vessel for the customers. The Partnership has elected to not separate the non-lease component from the lease component for all such charters, where the lease component is classified as an operating lease, and to account for the combined components as an operating lease.

 

The following table presents the Partnership’s revenues by lease and non-lease contracts for the three and six months ended June 30, 2019 and 2018:

 

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Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Lease revenue from lease payment of operating leases

 

$

70,908

 

$

69,221

 

$

141,456

 

$

136,608

 

Non-lease revenues (loss of hire insurance recoveries and other income)

 

14

 

544

 

15

 

1,200

 

Total revenues

 

$

70,922

 

$

69,765

 

$

141,471

 

$

137,808

 

 

As a result of the revised guidance on leasing, the lessor accounting did not change. See Note 2(c)—Recent Accounting Pronouncements.

 

As of June 30, 2019, the minimum contractual future revenues to be received from time charters and bareboat charters during the next five years and thereafter are as follows:

 

(U.S. Dollars in thousands)

 

 

 

2019 (excluding the six months ended June 30, 2019)

 

$

136,536

 

2020

 

240,710

 

2021

 

219,841

 

2022

 

152,078

 

2023

 

63,918

 

2024 and therafter

 

28,674

 

Total

 

$

841,757

 

 

The minimum contractual future revenues should not be construed to reflect total charter hire revenues for any of the years. Minimum contractual future revenues are calculated based on certain assumptions such as operating days per year. In addition, minimum contractual future revenues presented in the table above have not been reduced by estimated off-hire time for periodic maintenance. The amounts may vary given unscheduled future events such as vessel maintenance.

 

The Partnership’s fleet as of June 30, 2019 consisted of:

 

·                  the Fortaleza Knutsen, a shuttle tanker built in 2011 that is currently operating under a bareboat charter that expires in March 2023 with Fronape International Company, a subsidiary of Petrobras Transporte S.A. (“Transpetro”);

 

·                  the Recife Knutsen, a shuttle tanker built in 2011 that is currently operating under a bareboat charter that expires in August 2023 with Transpetro;

 

·                  the Bodil Knutsen, a shuttle tanker built in 2011 that is currently operating under a time charter that expires in May 2020 with Statoil ASA (now Equinor), with options to extend until May 2024;

 

·                  the Windsor Knutsen, a conventional oil tanker built in 2007 and retrofitted to a shuttle tanker in 2011. The vessel operated under a time charter with Brazil Shipping I Limited, a subsidiary of Shell, until July 2014. From July 2014 until October 2015, the vessel was employed under a time charter with KNOT. Beginning in October 2015, the vessel commenced operations under a two year time charter with Brazil Shipping I Limited, with options to extend until 2023. In March 2019, the time charter contract was suspended for ten to twelve months. During the suspension period, the Windsor Knutsen is operating under a time charter contract with Knutsen Shuttle Tankers Pool AS on the same terms as the existing contract with Shell. As a result of the suspension period, Shell has options to extend the time charter until October 2024. On July 16, 2019, a subsidiary of Shell exercised its option to extend the time charter of the Windsor Knutsen by one additional year until October 2020;

 

·                  the Carmen Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in January 2023, with Repsol Sinopec Brasil, B.V. a subsidiary of Repsol Sinopec Brasil, S.A. (“Repsol”), with options to extend until January 2026;

 

·                  the Hilda Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in August 2022 with Eni Trading and Shipping S.p.A. (“ENI”), with options to extend until August 2025;

 

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·                  the Torill Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in November 2019 with ENI, with options to extend until November 2023;

 

·                  the Dan Cisne, a shuttle tanker built in 2011 that is currently operating under a bareboat charter that expires in September 2023 with Transpetro;

 

·                  the Dan Sabia, a shuttle tanker built in 2012 that is currently operating under a bareboat charter that expires in January 2024 with Transpetro;

 

·                  the Ingrid Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in February 2024 with Standard Marine Tønsberg AS, a Norwegian subsidiary of ExxonMobil (“ExxonMobil”), with options to extend until February 2029;

 

·                  the Raquel Knutsen, a shuttle tanker built in 2015 that is currently operating under a time charter that expires in June 2025 with Repsol, with options to extend until June 2030;

 

·                  the Tordis Knutsen, a shuttle tanker built in 2016 that is currently operating under a time charter that expires in January 2022 with a subsidiary of Shell, with options to extend until January 2032;

 

·                  the Vigdis Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in the second quarter of 2022 with a subsidiary of Shell, with options to extend until the second quarter of 2032;

 

·                  the Lena Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in the third quarter of 2022 with a subsidiary of Shell, with options to extend until the third quarter of 2032;

 

·                  the Brasil Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in the third quarter of 2022 with Galp Sinopec Brazil Services B.V. (“Galp”), with options to extend until the third quarter of 2028; and

 

·                  the Anna Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in the second quarter of 2022 with Galp, with options to extend until the second quarter of 2028.

 

Lease obligations

 

The Partnership does not have any material leased assets but has some leased equipment on operational leases on the various ships operating on time charter contracts. Consequently, adoption of the new standard resulted in recording a right-of-use asset and a lease liability on the consolidated balance sheet for operating leases of $2.3 million as of January 1, 2019. There was no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessee accounting. As of June 30, 2019, the right-of-use asset and lease liability for operating leases was $2.1 million and are presented as separate line items on the balance sheets. The operating lease cost and corresponding cash flow effect for the three and six months ended June 30, 2019 was $0.2 million and $0.3 million respectively. As of June 30, 2019, the weighted average discount rate for the operating leases was 4.8% and was determined using the expected incremental borrowing rate for a loan facility of similar term. As of June 30, 2019, the weighted average remaining lease terms are 3.5 years.

 

A maturity analysis of the Partnership’s lease liabilities from leased-in equipment as of June 30, 2019 is as follows:

 

(U.S. Dollars in thousands)

 

 

 

2019 (excluding the six months ended June 30, 2019)

 

$

322

 

2020

 

644

 

2021

 

644

 

2022

 

644

 

Total

 

$

2,254

 

Less imputed interest

 

180

 

Carrying value of operating lease liabilities

 

$

2,074

 

 

5) Insurance Proceeds

 

During the fourth quarter of 2017, the Carmen Knutsen undertook her 5-year special drydocking survey. During dismantling for overhaul, a technical default with her controllable pitch propeller was found. As a result, the Vessel went to a different yard to complete the

 

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repair. Repairs were completed and the Vessel was back on hire on January 1, 2018. The additional off-hire and technical costs were subject to an insurance claim. Under its loss of hire insurance policies, the Partnership’s insurer paid the hire rate agreed in respect of the Carmen Knutsen for each day in excess of 14 deductible days while the Vessel was off-hire as a result of the repairs of the controllable pitch propeller. For the three and six months ended June 30, 2018, the Partnership recorded $0.45 million for loss of hire which were recorded as a component of total revenues since day rates are recovered under the terms of the policy.

 

For the year ended December 31, 2017, the Partnership recorded $2.40 million to vessel operating expense as an estimate of the cost of repairs of the controllable pitch propeller. For the six months ended June 30, 2018, an additional repair cost of $0.15 million was recorded to vessel operating expenses. As of June 30, 2018, the Partnership had received payments and recorded $2.25 million for hull and machinery repairs, resulting in a net expense of $0.30 million.

 

6) Other Finance Expenses

 

(a) Interest Expense

 

The following table presents a reconciliation of total interest cost and interest expense as reported in the consolidated statements of operations for the three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Interest expense

 

$

12,529

 

$

11,830

 

$

25,530

 

$

21,848

 

Amortization of debt issuance cost and fair value of debt assumed

 

657

 

696

 

1,314

 

1,271

 

Total interest cost

 

$

13,186

 

$

12,526

 

$

26,844

 

$

23,119

 

 

(b) Other Finance Expense

 

The following table presents the other finance expense for three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Bank fees, charges

 

$

224

 

$

151

 

$

281

 

$

241

 

Guarantee costs

 

 

140

 

 

282

 

Commitment fees

 

62

 

(3

)

123

 

103

 

Total other finance expense

 

$

286

 

$

288

 

$

404

 

$

626

 

 

7) Derivative Instruments

 

The unaudited condensed consolidated interim financial statements include the results of interest rate swap contracts to manage the Partnership’s exposure related to changes in interest rates on its variable rate debt instruments and the results of foreign exchange forward contracts to manage its exposure related to changes in currency exchange rates on its operating expenses, mainly crew expenses, in currency other than U.S. Dollars and on its contract obligations. The Partnership does not apply hedge accounting for derivative instruments. The Partnership does not speculate using derivative instruments.

 

By using derivative financial instruments to economically hedge exposures to changes in interest rates, the Partnership exposes itself to credit risk and market risk. Derivative instruments that economically hedge exposures are used for risk management purposes, but these instruments are not designated as hedges for accounting purposes. Credit risk is the failure of the counterparty to perform under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty owes the Partnership, which creates credit risk for the Partnership. When the fair value of a derivative instrument is negative, the Partnership owes the counterparty, and, therefore, the Partnership is not exposed to the counterparty’s credit risk in those circumstances. The Partnership minimizes counterparty credit risk in derivative instruments by entering into transactions with major banking and financial institutions. The derivative instruments entered into by the Partnership do not contain credit risk-related contingent features. The Partnership has not entered into master netting agreements with the counterparties to its derivative financial instrument contracts.

 

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates or commodity prices. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

 

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The Partnership assesses interest rate risk by monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating economical hedging opportunities.

 

The Partnership has historically used variable interest rate mortgage debt to finance its vessels. The variable interest rate mortgage debt obligations expose the Partnership to variability in interest payments due to changes in interest rates. The Partnership believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Partnership has entered into London Interbank Offered Rate (“LIBOR”)-based interest rate swap contracts to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable rate cash flow exposure on the mortgage debt obligations to fixed cash flows. Under the terms of the interest rate swap contracts, the Partnership receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed rate debt for the notional amount of its debt hedged.

 

As of June 30, 2019, the Partnership had entered into various interest swap agreements for a total notional amount of $571.5 million to hedge against the interest rate risks of its variable rate borrowings. Under the terms of the interest rate swap agreements, the Partnership receives interest based on three or six month LIBOR and pays a weighted average interest rate of 1.88%.

 

As of June 30, 2019 and December 31, 2018, the total notional amount of the Partnership’s outstanding interest rate swap contracts that were entered into in order to hedge outstanding or forecasted debt obligations were $571.5 million and $555.5 million, respectively. As of June 30, 2019 and December 31, 2018, the carrying amount of the interest rate swaps contracts was a net liability of $2.7 million and a net asset of $15.9 million, respectively. See Note 8—Fair Value Measurements.

 

Changes in the fair value of interest rate swap contracts are reported in realized and unrealized gain (loss) on derivative instruments in the same period in which the related interest affects earnings.

 

The Partnership and its subsidiaries utilize the U.S. Dollar as their functional and reporting currency, because all of their revenues and the majority of their expenditures, including the majority of their investments in vessels and their financing transactions, are denominated in U.S. Dollars. Payment obligations in currencies other than the U.S. Dollar, and in particular operating expenses in Norwegian Kroner (“NOK”), expose the Partnership to variability in currency exchange rates. The Partnership believes that it is prudent to limit the variability of a portion of its currency exchange exposure. To meet this objective, the Partnership entered into foreign exchange forward contracts to manage fluctuations in cash flows resulting from changes in the exchange rates towards the U.S. Dollar. The agreements change the variable exchange rate to fixed exchange rates at agreed dates.

 

As of June 30, 2019 and December 31, 2018, the total contract amount in foreign currency of the Partnership’s outstanding foreign exchange forward contracts that were entered into to economically hedge outstanding future payments in currencies other than the U.S. Dollar were NOK 169.0 million and NOK 244.2 million, respectively. As of June 30, 2019 and December 31, 2018, the carrying amount of the Partnership’s foreign exchange forward contracts was a net liability of $0.2 million and $1.7 million, respectively. See Note 8—Fair Value Measurements.

 

The following table presents the realized and unrealized gains and losses that are recognized in earnings as net gain (loss) on derivative instruments for the three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

1,168

 

$

57

 

$

2,246

 

$

(247

)

Foreign exchange forward contracts

 

(658

)

134

 

(1,446

)

1,239

 

Total realized gain (loss):

 

510

 

191

 

800

 

992

 

Unrealized gain (loss):

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

(11,521

)

2,995

 

(18,619

)

11,942

 

Foreign exchange forward contracts

 

693

 

(1,218

)

1,572

 

(990

)

Total unrealized gain (loss):

 

(10,828

)

1,777

 

(17,047

)

10,952

 

Total realized and unrealized gain (loss) on derivative instruments:

 

$

(10,318

)

$

1,968

 

$

(16,247

)

$

11,944

 

 

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Table of Contents

 

8) Fair Value Measurements

 

(a) Fair Value of Financial Instruments

 

The following table presents the carrying amounts and estimated fair values of the Partnership’s financial instruments as of June 30, 2019 and December 31, 2018. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

 

 

June 30, 2019

 

December 31, 2018

 

(U.S. Dollars in thousands)

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,429

 

$

42,429

 

$

41,712

 

$

41,712

 

Current derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

1,856

 

1,856

 

4,621

 

4,621

 

Foreign exchange forward contracts

 

125

 

125

 

 

 

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

914

 

914

 

11,667

 

11,667

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

132

 

132

 

 

 

Foreign exchange forward contracts

 

294

 

294

 

1,740

 

1,740

 

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

5,314

 

5,314

 

345

 

345

 

Long-term debt, current and non-current

 

1,045,686

 

1,045,686

 

1,087,347

 

1,087,347

 

 

The carrying amounts shown in the table above are included in the consolidated balance sheets under the indicated captions. Carrying amount of long-term debt, current and non-current, above excludes capitalized debt issuance cost of $8.7 million and $10.1 million as of June 30, 2019 and December 31, 2018, respectively. The carrying value of trade accounts receivable, trade accounts payable and receivables/payables to owners and affiliates approximate their fair value.

 

The fair values of the financial instruments shown in the above table as of June 30, 2019 and December 31, 2018 represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Partnership’s own judgment about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Partnership based on the best information available in the circumstances, including expected cash flows, appropriately risk-adjusted discount rates and available observable and unobservable inputs.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

·                  Cash and cash equivalents and restricted cash : The fair value of the Partnership’s cash balances approximates the carrying amounts due to the current nature of the amounts. As of June 30, 2019 and December 31, 2018 there is no restricted cash.

 

·                  Foreign exchange forward contracts : The fair value is calculated using mid-rates (excluding margins) as determined by counterparties based on available market rates as of the balance sheet date. The fair value is discounted from the value at expiration to the current value of the contracts.

 

·                  Interest rate swap contracts : The fair value of interest rate swap contracts is determined using an income approach using the following significant inputs: (1) the term of the swap contract (weighted average of 4.4 years and 4.9 years, as of June 30, 2019 and December 31, 2018, respectively), (2) the notional amount of the swap contract (ranging from $9.3 million to $50.0 million for the contracts as of June 30, 2019 and ranging from $10.0 million to $50.0 million for the contracts as of December 31, 2018), discount rates interpolated based on relevant LIBOR swap curves; and (3) the rate on the fixed leg of the swap contract (rates ranging from 1.38% to 2.90% as of June 30, 2019 and as of December 31, 2018).

 

·                  Long-term debt : With respect to long-term debt measurements, the Partnership uses market interest rates and adjusts for risks, such as its own credit risk. In determining an appropriate spread to reflect its credit standing, the Partnership considered interest rates currently offered to KNOT for similar debt instruments of comparable maturities by KNOT’s and the Partnership’s bankers as well as other banks that regularly compete to provide financing to the Partnership.

 

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(b) Fair Value Hierarchy

 

The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value or for which fair value is required to be disclosed) as of June 30, 2019 and December 31, 2018:

 

 

 

 

 

Fair Value Measurements
at Reporting Date Using

 

(U.S. Dollars in thousands)

 

Carrying
Value
June 30, 2019

 

Quoted Price
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,429

 

$

42,429

 

$

 

$

 

Current derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

1,856

 

 

1,856

 

 

Foreign exchange forward contracts

 

125

 

 

125

 

 

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

914

 

 

914

 

 

Foreign exchange forward contracts

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

132

 

 

132

 

 

Foreign exchange forward contracts

 

294

 

 

294

 

 

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

5,314

 

 

5,314

 

 

Foreign exchange forward contracts

 

 

 

 

 

Long-term debt, current and non-current

 

1,045,686

 

 

1,045,686

 

 

 

15


Table of Contents

 

 

 

 

 

Fair Value Measurements
at Reporting Date Using

 

(U.S. Dollars in thousands)

 

Carrying
Value
December 31,
2018

 

Quoted Price
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,712

 

$

41,712

 

$

 

$

 

Current derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

4,621

 

 

4,621

 

 

Foreign exchange forward contracts

 

 

 

 

 

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

11,667

 

 

11,667

 

 

Foreign exchange forward contracts

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

 

 

 

Foreign exchange forward contracts

 

1,740

 

 

1,740

 

 

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

345

 

 

345

 

 

Foreign exchange forward contracts

 

 

 

 

 

Long-term debt, current and non-current

 

1,087,347

 

 

1,087,347

 

 

 

The Partnership’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2 or Level 3 as of June 30, 2019 and December 31, 2018.

 

9) Income Taxes

 

Components of Current and Deferred Tax Expense

 

After the reorganization of the Partnership’s predecessor’s activities into the new group structure in February 2013, all profit from continuing operations in Norway is taxable within the tonnage tax regime. The consequence of the reorganization was a one-time entrance tax into the tonnage tax regime due to the Partnership’s acquisition of the shares in the subsidiary that owns the Fortaleza Knutsen and the Recife Knutsen. Under the tonnage tax regime, the tax is based on the tonnage of the vessel and operating income is tax free. The net financial income and expense remains taxable as ordinary income tax for entities subject to the tonnage tax regime. Income taxes arising from the part of activities subject to ordinary taxation are included in income tax expense in the consolidated statements of operations.  For the portion of activities subject to the tonnage tax regime, tonnage taxes are classified as vessel operating expenses while the current and deferred taxes arising on net financial income and expense are reflected as income tax expense in the consolidated statements of operations.

 

The total amount of the entrance tax was estimated to be approximately $3.0 million, which was recognized in the three months ended March 31, 2013. The entrance tax is payable over several years and is calculated by multiplying the tax rate by the declining balance of the gain, which will decline by 20% each year. The amount payable will be affected by the change in tax rate which was reduced to 22% in 2019 from 23% in 2018. Approximately $0.1 million and $0.2 million of the entrance tax was paid during the first quarter of 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, UK income tax is presented as income taxes payable, while $0.5 million is presented as non-current deferred taxes payable.

 

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Significant components of current and deferred income tax expense attributable to income from continuing operations for the three and six months ended June 30, 2019 and 2018 were as follows:

 

(U.S. Dollars in 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

thousands)

 

2019

 

2018

 

2019

 

2018

 

Income before income taxes

 

$

8,179

 

$

21,684

 

$

21,051

 

$

52,411

 

Income tax (expense)

 

(3

)

(3

)

(6

)

(6

)

Effective tax rate

 

$

0

%

$

0

%

$

0

%

$

0

%

 

The Partnership records a valuation allowance for deferred tax assets when it is more likely than not that some of or all of the benefit from the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, which relates to financial loss carry forwards and other deferred tax assets within the tonnage tax regime, the Partnership considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized taking into account all the positive and negative evidence available. As of June 30, 2019 and December 31, 2018 there are no deferred tax assets recognized.

 

10) Vessels and Equipment

 

As of June 30, 2019 and December 2018, Vessels with a book value of $1,722 million and $1,767 million, respectively, are pledged as security held as a guarantee for the Partnership’s long-term debt. See Note 12—Long-term debt.

 

(U.S. Dollars in thousands)

 

Vessels &
equipment

 

Accumulated depreciation

 

Net
Vessels

 

Vessels, December 31, 2017

 

$

2,003,341

 

$

(280,318

)

$

1,723,023

 

Additions

 

118,063

 

 

118,063

 

Drydock costs

 

14,750

 

 

14,750

 

Disposals

 

(5,731

)

5,731

 

 

Depreciation for the year

 

 

(88,756

)

(88,756

)

Vessels, December 31, 2018

 

$

2,130,423

 

$

(363,343

)

$

1,767,080

 

Additions

 

 

 

 

Drydock costs

 

(69

)

 

(69

)

Disposals

 

 

 

 

Depreciation for the period

 

 

(44,860

)

(44,860

)

Vessels, June 30, 2019

 

$

2,130,354

 

$

(408,203

)

$

1,722,151

 

 

11) Intangible Assets

 

(U.S. Dollars in thousands)

 

Above market time
charter
Tordis Knutsen

 

Above market time charter
Vigdis Knutsen

 

Total
intangibles

 

Intangibles, December 31, 2017

 

$

1,215

 

$

1,282

 

$

2,497

 

Additions

 

 

 

 

Amortization for the year

 

(304

)

(302

)

(606

)

Intangibles, December 31, 2018

 

$

911

 

$

980

 

$

1,891

 

Additions

 

 

 

 

Amortization for the period

 

(151

)

(151

)

(302

)

Intangibles, June 30, 2019

 

$

760

 

$

829

 

$

1,589

 

 

The intangible for the above-market value of the time charter contract associated with the Tordis Knutsen is amortized to time charter revenue on a straight line basis over the remaining term of the contract of approximately 4.8 years as of the acquisition date.

 

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The intangible for the above-market value of the time charter contract associated with the Vigdis Knutsen is amortized to time charter revenue on a straight line basis over the remaining term of the contract of approximately 4.9 years as of the acquisition date.

 

12) Long-Term Debt

 

As of June 30, 2019 and December 31, 2018, the Partnership had the following debt amounts outstanding:

 

(U.S. Dollars in thousands)

 

Vessel

 

June 30,
2019

 

December 31,
2018

 

$320 million loan facility

 

Windsor Knutsen, Bodil Knutsen, Carmen Knutsen, Fortaleza Knutsen, Recife Knutsen, Ingrid Knutsen

 

$

297,416

 

$

312,472

 

$55 million revolving credit facility

 

 

 

26,279

 

26,279

 

Hilda loan facility

 

Hilda Knutsen

 

87,692

 

90,769

 

Torill loan facility

 

Torill Knutsen

 

91,667

 

95,000

 

$172.5 million loan facility

 

Dan Cisne, Dan Sabia

 

76,839

 

81,839

 

Raquel loan facility

 

Raquel Knutsen

 

60,569

 

63,184

 

Tordis loan facility

 

Tordis Knutsen

 

83,461

 

85,991

 

Vigdis loan facility

 

Vigdis Knutsen

 

84,726

 

87,256

 

Lena loan facility

 

Lena Knutsen

 

83,300

 

85,750

 

Brasil loan facility

 

Brasil Knutsen

 

60,423

 

63,454

 

Anna loan facility

 

Anna Knutsen

 

68,314

 

70,353

 

$25 million revolving credit facility

 

 

 

25,000

 

25,000

 

Total long-term debt

 

 

 

1,045,686

 

1,087,347

 

Less: current installments

 

 

 

85,845

 

109,534

 

Less: unamortized deferred loan issuance costs

 

 

 

2,560

 

2,608

 

Current portion of long-term debt

 

 

 

83,285

 

106,926

 

Amounts due after one year

 

 

 

959,841

 

977,813

 

Less: unamortized deferred loan issuance costs

 

 

 

6,161

 

7,448

 

Long-term debt, less current installments, and unamortized deferred loan issuance costs

 

 

 

$

953,680

 

$

970,365

 

 

The Partnership’s outstanding debt of $1,045.7 million as of June 30, 2019 is repayable as follows:

 

(U.S. Dollars in thousands)

 

Period repayment

 

Balloon repayment

 

Remainder of 2019

 

$

42,873

 

$

 

2020

 

85,945

 

 

2021

 

86,545

 

95,811

 

2022

 

71,210

 

236,509

 

2023

 

55,535

 

202,185

 

2024 and thereafter

 

15,180

 

153,893

 

Total

 

$

357,288

 

$

688,398

 

 

As of June 30, 2019, the interest rates on the Partnership’s loan agreements were LIBOR plus a fixed margin ranging from 1.8% to 2.4%.

 

On June 28, 2019, the Partnership’s subsidiary, KNOT Shuttle Tankers AS, which owns the vessel-owning entities, extended the maturity of its unsecured revolving credit facility of $25 million with NTT Finance Corporation. The facility matures in August 2021,

 

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bears interest at LIBOR plus 1.8% and has a commitment fee of 0.5% on the undrawn portion of the facility. The commercial terms of the facility are unchanged from the facility entered into in June 2017 with NTT Finance Corporation.

 

13) Related Party Transactions

 

(a) Related Parties

 

Net expenses (income) from related parties included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Statements of operations:

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

Guarantee income from KNOT (1) 

 

$

 

$

94

 

$

 

$

749

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Technical and operational management fee from KNOT to Vessels (2)

 

1,736

 

1,509

 

3,479

 

3,019

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

Administration fee from KNOT Management (3)

 

314

 

449

 

648

 

812

 

Administration fee from KOAS (3)

 

174

 

148

 

345

 

290

 

Administration fee from KOAS UK (3)

 

30

 

30

 

60

 

60

 

Administration and management fee from KNOT (4)

 

42

 

41

 

85

 

80

 

Total

 

$

2,296

 

$

2,083

 

$

4,617

 

$

3,512

 

 

(U.S. Dollars in thousands)

 

At June 30,
2019

 

At December 31,
2018

 

Balance Sheet:

 

 

 

 

 

Vessels:

 

 

 

 

 

Drydocking supervision fee from KNOT (5)

 

$

 

$

187

 

Drydocking supervision fee from KOAS (5)

 

 

24

 

Total

 

$

 

$

211

 

 


(1)              Guarantee income from KNOT: Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charter of the Bodil Knutsen and Windsor Knutsen for a period of five years from the closing date of the IPO (until April 15, 2018). In October 2015, the Windsor Knutsen commenced on a new Shell time charter with a hire rate below the hire rate in the initial charter. The difference between the new hire rate and the initial rate was paid by KNOT until April 15, 2018. See Note 13(b)—Related Party Transactions—Guarantees and Indemnifications.

(2)              Technical and operational management fee from KNOT Management or KNOT Management Denmark to Vessels: KNOT Management or KNOT Management Denmark provides technical and operational management of the vessels on time charter including crewing, purchasing, maintenance and other operational service. In addition, there is also a charge for 24-hour emergency response services provided by KNOT Management for all vessels managed by KNOT Management.

(3)              Administration fee from KNOT Management, Knutsen OAS Shipping AS (“KOAS”) and Knutsen OAS (UK) Ltd. (“KOAS UK”) : Administration costs include the compensation and benefits of KNOT Management’s management and administrative staff as well as other general and administration expenses. Some benefits are also provided by KOAS and KOAS UK. Net administration costs are total administration cost plus a 5% margin, reduced for the total fees for services delivered by the administration staffs and the estimated shareholder costs for KNOT that have not been allocated. As such, the level of net administration costs as a basis for the allocation can vary from year to year based on the administration and financing services offered by KNOT to all the vessels in its fleet each year. KNOT Management also charges each subsidiary a fixed annual fee for the preparation of the statutory financial statement.

(4)              Administration and management fee from KNOT Management and KNOT Management Denmark : For bareboat charters, the shipowner is not responsible for providing crewing or other operational services and the customer is responsible for all vessel operating expenses and voyage expenses. However, each of the vessels under bareboat charters is subject to a management and administration agreement with either KNOT Management or KNOT Management Denmark, pursuant to which these companies provide general monitoring services for the vessels in exchange for an annual fee.

(5)              Drydocking supervision fee from KNOT and KOAS : KNOT and KOAS provide supervision and hire out service personnel during drydocking of the vessels. The fee is calculated as a daily fixed fee.

 

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(b) Guarantees and Indemnifications

 

Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charters of each of the Windsor Knutsen and the Bodil Knutsen for a period of five years from the closing date of the IPO (until April 15, 2018).

 

In April 2014, the Partnership was notified that Shell would not exercise its option to extend the Windsor Knutsen time charter after the expiration of its initial term. The vessel was re-delivered on July 28, 2014. In order to comply with its obligations under the Omnibus Agreement, on July 29, 2014, KNOT and the Partnership entered into a time charter for the vessel at a rate of hire that would have been in effect during the option period under the previous Shell time charter. This charter was effective until the new Shell time charter commenced in October 2015. The new Shell charter has a hire rate that is lower than the hire rate in the initial charter. The difference between the new hire rate and the initial rate was paid by KNOT until April 15, 2018.

 

Under the Omnibus Agreement, KNOT agreed to indemnify the Partnership until April 15, 2018 (or for a period of at least three years after the purchase of the Hilda Knutsen , the Torill Knutsen , the Ingrid Knutsen and the Raquel Knutsen , as applicable), against certain environmental and toxic tort liabilities with respect to certain assets that KNOT contributed or sold to the Partnership to the extent arising prior to the time they were contributed or sold. However, claims are subject to a deductible of $0.5 million and an aggregate cap of $5 million.

 

(c) Transactions with Management and Directors

 

See the footnotes to Note 13(a)—Related Party Transactions for a discussion of the allocation principles for KNOT’s administrative costs, including management and administrative staff, included in the consolidated statements of operations.

 

(d) Amounts Due from (to) Related Parties

 

Balances with related parties consisted of the following:

 

(U.S. Dollars in thousands)

 

At June 30,
2019

 

At December 31,
2018

 

Balance Sheet:

 

 

 

 

 

Trading balances due from KOAS

 

$

578

 

$

466

 

Trading balances due from KNOT and affiliates

 

926

 

675

 

Amount due from related parties

 

$

1,504

 

$

1,141

 

Trading balances due to KOAS

 

$

688

 

$

629

 

Trading balances due to KNOT and affiliates

 

501

 

441

 

Amount due to related parties

 

$

1,189

 

$

1,070

 

 

Amounts due from (to) related parties are unsecured and intended to be settled in the ordinary course of business. The majority of these related party transactions relate to vessel management and other fees due to KNOT, KNOT Management, KOAS UK and KOAS.

 

(e) Trade accounts payable

 

Trade accounts payable to related parties are included in total trade accounts payable in the balance sheet. The balances to related parties consisted of the following:

 

(U.S. Dollars in thousands)

 

At June 30,
2019

 

At December 31,
2018

 

Balance Sheet:

 

 

 

 

 

Trading balances due to KOAS

 

$

552

 

$

381

 

Trading balances due to KNOT and affiliates

 

382

 

411

 

Trade accounts payable to related parties

 

$

934

 

$

792

 

 

(f) Acquisitions from KNOT

 

On March 1, 2018, the Partnership acquired KNOT’s 100% interest in KNOT Shuttle Tankers 30 AS (“KNOT 30”), the company that owns and operates the Anna Knutsen. This acquisition was accounted for as an acquisition of assets.

 

The board of directors of the Partnership (the “Board”) and the conflicts committee of the Board (the “Conflicts Committee”) approved the purchase price for the transaction described above. The Conflicts Committee retained a financial advisor to assist with its evaluation of the transaction. See Note 16—Acquisitions.

 

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14) Commitments and Contingencies

 

Assets Pledged

 

As of June 30, 2019 and December 31, 2018, Vessels with a book value of $1,722 million and $1,767 million, respectively, were pledged as security held as guarantee for the Partnership’s long-term debt and interest rate swap obligations. See Note 7—Derivative Instruments and Note 12—Long-Term Debt.

 

Claims and Legal Proceedings

 

From time to time, the Partnership is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows.

 

Insurance

 

The Partnership maintains insurance on all the Vessels to insure against marine and war risks, which include damage to or total loss of the Vessels, subject to deductible amounts that average $0.15 million per Vessel, and loss of hire.

 

Under the loss of hire policies, the insurer will pay a compensation for the lost hire rate agreed in respect of each Vessel for each day, in excess of 14 deductible days, for the time that the Vessel is out of service as a result of damage, for a maximum of 180 days. In addition, the Partnership maintains protection and indemnity insurance, which covers third-party legal liabilities arising in connection with the Vessels’ activities, including, among other things, the injury or death of third-party persons, loss or damage to cargo, claims arising from collisions with other vessels and other damage to other third-party property, including pollution arising from oil or other substances. This insurance is unlimited, except for pollution, which is limited to $1 billion per vessel per incident. The protection and indemnity insurance is maintained through a protection and indemnity association, and as a member of the association, the Partnership may be required to pay amounts above budgeted premiums if the member claims exceed association reserves, subject to certain reinsured amounts. If the Partnership experiences multiple claims each with individual deductibles, losses due to risks that are not insured or claims for insured risks that are not paid, it could have a material adverse effect on the Partnership’s results of operations and financial condition.

 

Carmen Knutsen

 

During the fourth quarter of 2017, the Carmen Knutsen undertook her 5-year special drydocking survey. During dismantling for overhaul, a technical default with her controllable pitch propeller was found. As a result, the Vessel went to a different yard to complete the repair. Repairs were completed and the Vessel was back on hire on January 1, 2018. The additional off-hire and technical costs were subject to an insurance claim. Under its loss of hire insurance policies, the Partnership’s insurer paid the hire rate agreed in respect of the Carmen Knutsen for each day in excess of 14 deductible days while the Vessel was off-hire as a result of the repairs of the controllable pitch propeller. For the three and six months ended June 30, 2018, the Partnership recorded $0.45 million for loss of hire which were recorded as a component of total revenues since day rates are recovered under the terms of the policy.

 

For the year ended December 31, 2017, the Partnership recorded $2.40 million to vessel operating expense as an estimate of the cost of repairs of the controllable pitch propeller. For the six months ended June 30, 2018, an additional repair cost of $0.15 million was recorded to vessel operating expenses. As of June 30, 2018, the Partnership had received payments and recorded $2.25 million for hull and machinery repairs, resulting in a net expense of $0.30 million. See Note 5—Insurance Proceeds.

 

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15) Earnings per Unit and Cash Distributions

 

The calculations of basic and diluted earnings per unit (1) are presented below:

 

(U.S. Dollars in thousands, except per unit

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

data)

 

2019

 

2018

 

2019

 

2018

 

Net income

 

$

8,176

 

$

21,681

 

$

21,045

 

$

52,405

 

Less: Series A Preferred unitholders’ interest in net income

 

1,800

 

1,800

 

3,600

 

3,600

 

Net income attributable to the unitholders of KNOT Offshore Partners LP

 

6,376

 

19,881

 

17,445

 

48,805

 

Less: Distributions (2) 

 

18,034

 

18,034

 

36,068

 

36,068

 

Under (over) distributed earnings

 

(11,658

)

1,847

 

(18,623

)

12,737

 

Under (over) distributed earnings attributable to:

 

 

 

 

 

 

 

 

 

Common unitholders (3)

 

(11,442

)

1,813

 

(18,279

)

12,502

 

General Partner

 

(215

)

34

 

(344

)

235

 

Weighted average units outstanding (basic) (in thousands):

 

 

 

 

 

 

 

 

 

Common unitholders

 

32,694

 

32,694

 

32,694

 

32,694

 

General Partner

 

615

 

615

 

615

 

615

 

Weighted average units outstanding (diluted) (in thousands):

 

 

 

 

 

 

 

 

 

Common unitholders (4)

 

32,694

 

36,355

 

32,694

 

36,360

 

General Partner

 

615

 

615

 

615

 

615

 

Earnings per unit (basic)

 

 

 

 

 

 

 

 

 

Common unitholders

 

$

0.191

 

$

0.597

 

$

0.524

 

$

1.465

 

General Partner

 

0.191

 

0.597

 

0.524

 

1.465

 

Earnings per unit (diluted):

 

 

 

 

 

 

 

 

 

Common unitholders (4)

 

$

0.191

 

$

0.585

 

$

0.524

 

$

1.415

 

General Partner

 

0.191

 

0.597

 

0.524

 

1.465

 

Cash distributions declared and paid in the period per unit (5)

 

0.520

 

0.520

 

1.040

 

1.040

 

Subsequent event: Cash distributions declared and paid per unit relating to the period (6)

 

0.520

 

0.520

 

1.040

 

1.040

 

 


(1)            Earnings per unit have been calculated in accordance with the cash distribution provisions set forth in the Partnership Agreement.

(2)            This refers to distributions made or to be made in relation to the period irrespective of the declaration and payment dates and based on the number of units outstanding at the record date. This includes cash distributions to the IDR holder (KNOT) for the three months ended June 30, 2019 and 2018 of $0.7 million and for the six months ended June 30, 2019 and 2018 of $1.4 million.

(3)            This includes the net income attributable to the IDR holder. The net income attributable to IDRs for the three months ended June 30, 2019 and 2018 was $0.7 million and for the six months ended June 30, 2019 and 2018 was $1.4.

(4)            Diluted weighted average units outstanding and earnings per unit diluted for the three and six months ended June 30, 2019 does not reflect any potential common shares relating to the convertible preferred units since the assumed issuance of any additional shares would be anti-dilutive.

(5)            Refers to cash distributions declared and paid during the period.

(6)            Refers to cash distributions declared and paid subsequent to the period end.

 

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As of June 30, 2019, 73.5% of the Partnership’s total number of common units outstanding representing limited partner interests were held by the public (in the form of 24,036,226 common units) and 26.2% of such units were held directly by KNOT (in the form of 8,567,500 common units). In addition, KNOT, through its ownership of the General Partner, held a 1.85% general partner interest (in the form of 615,117 general partner units) and a 0.3% limited partner interest (in the form of 90,368 common units).

 

Earnings per unit — basic is determined by dividing net income, after deducting the amount of net income attributable to the Series A Preferred Units and the distribution paid or to be made in relation to the period, by the weighted-average number of units outstanding during the applicable period.

 

The computation of limited partners’ interest in net income per common unit — diluted assumes the issuance of common units for all potentially dilutive securities consisting of 3,750,000 Series A Preferred Units. Consequently, the net income attributable to limited partners’ interest is exclusive of any distributions on the Series A Preferred Units. In addition, the weighted average number of common units outstanding has been increased assuming the Series A Preferred Units have been converted to common units using the if-converted method. The computation of limited partners’ interest in net income per common unit — diluted does not assume the issuance of Series A Preferred Units if the effect would be anti-dilutive.

 

The General Partner’s and common unitholders’ interest in net income was calculated as if all net income was distributed according to the terms of the Partnership Agreement, regardless of whether those earnings would or could be distributed. The Partnership Agreement does not provide for the distribution of net income. Rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter less the amount of cash reserves established by the Board to provide for the proper conduct of the Partnership’s business, including reserves for maintenance and replacement capital expenditures, anticipated credit needs and capital requirements and any accumulated distributions on, or redemptions of, the Series A Preferred Units. In addition, KNOT, as the initial holder of all IDRs, has the right, at the time when it has received incentive distributions at the highest level to which it is entitled (48.0% for each of the prior four consecutive fiscal quarters), to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Unlike available cash, net income is affected by non-cash items, such as depreciation and amortization, unrealized gains and losses on derivative instruments and unrealized foreign currency gains and losses.

 

16) Acquisitions

 

In March 2018, the Partnership acquired from KNOT equity interests in the subsidiary which own and operate the Anna Knutsen.

 

The Board and the Conflicts Committee approved the purchase price for the transaction. The Conflicts Committee retained a financial advisor to assist with its evaluation of the transaction. The details of the transaction are as follows:

 

(U.S. Dollars in thousands)

 

Final
Anna Knutsen
March 1,
2018

 

Purchase consideration (1)

 

$

19,913

 

Less: Fair value of net assets acquired:

 

 

 

Vessels and equipment (2)

 

120,274

 

Cash

 

4,537

 

Inventories

 

257

 

Derivative assets

 

1,839

 

Others current assets

 

111

 

Amounts due from related parties

 

520

 

Long-term debt

 

(84,217

)

Long-term debt from related parties

 

(22,535

)

Deferred debt issuance

 

1,228

 

Trade accounts payable

 

(971

)

Accrued expenses

 

(1,013

)

Amounts due to related parties

 

(117

)

Subtotal

 

19,913

 

Difference between the purchase price and fair value of net assets acquired

 

$

 

 

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(1) The purchase price is comprised of the following:

 

(U.S. Dollars in thousands)

 

Final
AnnaKnutsen
March 1,
2018

 

Cash consideration paid to KNOT (from KNOT)

 

$

14,637

 

Purchase price adjustments

 

5,276

 

Purchase price

 

$

19,913

 

 

(2)                   Vessel and equipment includes allocation to drydocking of $2,329. 

 

Anna Knutsen

 

On March 1, 2018, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT’s 100% interest in KNOT 30, the company that owns and operates the Anna Knutsen. The purchase price for the vessel was $120.0 million, less $106.8 million of outstanding indebtedness, plus approximately $1.4 million for certain capitalized fees related to the financing of the vessel and plus other purchase price adjustments of $5.3 million.

 

Following of adoption of ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, the Partnership accounted for this acquisition as an acquisition of an asset. The cost of the group of assets acquired in the asset acquisition has been allocated to the individual assets acquired or liabilities assumed based on their relative fair values.

 

17) Subsequent Events

 

The Partnership has evaluated subsequent events from the balance sheet date through August 29, 2019, the date at which the unaudited condensed consolidated interim financial statements were available to be issued, and determined that there are no other items to disclose, except as follows:

 

On July 16, 2019, a subsidiary of Shell exercised its option to extend the time charter of the vessel Windsor Knutsen by one additional year until October 2020.

 

On August 14, 2019, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2019 to all common unitholders of record on July 26, 2019. On August 14, 2019, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended June 30, 2019 in an aggregate amount equal to $1.8 million.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Unless the context otherwise requires, references in this report to the “Partnership,” “we,” “our,” “us” or like terms, refer to KNOT Offshore Partners LP and its subsidiaries. Those statements in this section that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See “Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.

 

This section should be read in conjunction with our unaudited condensed consolidated financial statements for the interim periods presented elsewhere in this report, as well as our historical consolidated financial statements and notes thereto included in our Annual Report on Form 20-F for the year ended December 31, 2018 (the “2018 20-F”). Under our Partnership Agreement, KNOT Offshore Partners GP LLC, the general partner of the Partnership (the “General Partner”), has irrevocably delegated to the Partnership’s board of directors the power to oversee and direct the operations of, and to manage and determine the strategies and policies of, the Partnership. During the period from the Partnership’s initial public offering (“IPO”) in April 2013 until the time of the Partnership’s first annual general meeting (“AGM”) on June 25, 2013, the General Partner retained the sole power to appoint, remove and replace all members of the Partnership’s board of directors. From the first AGM, four of the seven board members became electable by the common unitholders and accordingly, from this date, the General Partner no longer retained the power to control the Partnership’s board of directors and, hence, the Partnership. As a result, the Partnership is no longer considered to be under common control with Knutsen NYK Offshore Tankers AS (“KNOT”) and as a consequence, the Partnership no longer accounts for any vessel acquisitions from KNOT as transfer of a business between entities under common control.

 

General

 

We are a limited partnership formed to own, operate and acquire shuttle tankers under long-term charters, which we define as charters of five years or more. Our fleet of shuttle tankers has been contributed to us by KNOT or purchased by us from KNOT. KNOT is jointly owned by TS Shipping Invest AS (“TSSI”) and Nippon Yusen Kaisha (“NYK”). TSSI is controlled by our Chairman and is a private Norwegian company with ownership interests in shuttle tankers, LNG tankers and product/chemical tankers. NYK is a Japanese public company with a fleet of approximately 700 vessels, including bulk carriers, containerships, tankers and specialized vessels.

 

As of June 30, 2019, we had a modern fleet of sixteen shuttle tankers that operate under charters with major oil and gas companies engaged in offshore production. Our primary business objective is to increase quarterly distributions per unit over time by growing our business through accretive acquisitions of shuttle tankers and by chartering our vessels pursuant to long-term charters with high quality customers that generate long-term stable cash flows. Pursuant to the Omnibus Agreement we have entered into with KNOT in connection with the IPO (the “Omnibus Agreement”), we have the right to purchase from KNOT any shuttle tankers operating under charters of five or more years. This right will continue throughout the entire term of the Omnibus Agreement.

 

Recent Developments

 

Cash Distributions

 

On May 15, 2019, the Partnership paid a cash distribution of $0.52 per common unit with respect to the quarter ended March 31, 2019 to all common unitholders of record on May 2, 2019. On May 15, 2019, the Partnership also paid a cash distribution to the Series A Preferred unitholders with respect to the quarter ended March 31, 2019 in an aggregate amount equal to $1.8 million.

 

On August 14, 2019, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2019 to all common unitholders of record on July 26, 2019. On August 14, 2019, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended June 30, 2019 in an aggregate amount equal to $1.8 million.

 

Revolving Credit Facility

 

On June 28, 2019, the Partnership extended the maturity of its unsecured revolving credit facility of $25 million with NTT Finance Corporation. The facility matures in August 2021, bears interest at LIBOR plus 1.8% and has a commitment fee of 0.5% on the undrawn portion of the facility. The commercial terms of the facility are unchanged from the facility entered into in June 2017 with NTT Finance Corporation.

 

Extension of Windsor Knutsen Charter

 

On December 17, 2018, the Partnership’s subsidiary that owns the Windsor Knutsen and Royal Dutch Shell (“Shell”) agreed to suspend the vessel’s time charter contract.  The suspension period commenced March 4, 2019 and will last between a minimum period of 10 months and a maximum period of 12 months.  During the suspension period, the Windsor Knutsen has been operating under a time charter contract with Knutsen Shuttle Tankers Pool AS, on the same terms as the existing time charter contract with Shell.

 

On July 16, 2019, a subsidiary of Shell exercised its option to extend the time charter of the vessel Windsor Knutsen by one additional year until October 2020.  Following the extension, Shell has four remaining one-year options to extend the time charter until October 2024.

 

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Partnership Matters

 

On August 28, 2019, the Partnership convened its 2019 annual meeting of limited partners.  However, due to lack of quorum, the meeting was adjourned until Friday, September 13, 2019 at 12.00 noon (UK time) at 1 Elmfield Park, Bromley BR1 1LU, United Kingdom.  No changes have been made in the proposal to be voted on by unitholders at the annual meeting. The Partnership’s proxy statement and any other materials filed by the Partnership with the SEC remain unchanged.

 

Results of Operations

 

Three Months Ended June 30, 2019 Compared with the Three Months Ended June 30, 2018

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

Change

 

%
Change

 

Time charter and bareboat revenues

 

$

70,908

 

$

69,221

 

$

1,687

 

2

%

Loss of hire insurance recoveries

 

 

450

 

(450

)

-100

%

Other income

 

14

 

94

 

(80

)

-85

%

Vessel operating expenses

 

15,301

 

13,974

 

1,327

 

9

%

Depreciation

 

22,429

 

22,332

 

97

 

0

%

General and administrative expenses

 

1,264

 

1,350

 

(86

)

-6

%

Interest income

 

233

 

161

 

72

 

45

%

Interest expense

 

(13,186

)

(12,526

)

(660

)

5

%

Other finance expense

 

(286

)

(288

)

2

 

-1

%

Realized and unrealized gain (loss) on derivative instruments

 

(10,318

)

1,968

 

(12,286

)

-624

%

Net gain (loss) on foreign currency transactions

 

(192

)

260

 

(452

)

-174

%

Income tax (expense)

 

(3

)

(3

)

 

0

%

Net income

 

8,176

 

21,681

 

(13,505

)

-62

%

 

Time Charter and Bareboat Revenues: Time charter and bareboat revenues increased by $1.7 million to $70.9 million for the three months ended June 30, 2019 compared to $69.2 million for the three months ended June 30, 2018. The increase was mainly due to receipt of the full earnings from the Brasil Knutsen in the first quarter of 2019 after its scheduled first special survey drydocking in the second quarter of 2018. This was partly offset by reduced earnings from the Bodil Knutsen due to its reduced daily rate from May 2019, when the vessel began operating under its new time charter option.

 

Loss of hire insurance recoveries: Loss of hire insurance recoveries for the three months ended June 30, 2019 were $nil million compared to $0.5 million for the three months ended June 30, 2018. The recoveries were related to a technical default with Carmen Knutsen’s controllable pitch propeller which was found when the vessel undertook her 5-years special survey drydocking during the fourth quarter of 2017. As a result, the vessel went to a different yard to complete the repair. Repairs were completed, and the vessel was back on hire on January 1, 2018. Under our loss of hire polices, our insurer paid us the hire rate under the time charter in respect of the vessel for each day, in excess of 14 deductible days, for the time that the vessel was of service as a result of the damage.

 

Other income: Other income for the three months ended June 30, 2019 was $nil million compared to $0.1 million for the three months ended June 30, 2018. The decrease mainly relates to the KNOT guarantee income regarding the Windsor Knutsen, which expired April 15, 2018.

 

Vessel operating expenses: Vessel operating expenses for the three months ended June 30, 2019 were $15.3 million, an increase of $1.3 million from $14.0 million in the three months ended June 30, 2018. The increase is mainly attributable to insurance recoveries received in the three months ended June 30, 2018 in connection with the propeller repairs of the Carmen Knutsen. The increase was partially offset by reduced operating expenses for the Brasil Knutsen in the second quarter of 2019 compared to the second quarter of 2018 when the vessel had a scheduled drydocking and incurred $0.8 million of expenses for bunkers consumption.

 

Depreciation: Depreciation expense for the three months ended June 30, 2019 was $22.4 million, an increase of $0.1 million from $22.3 million in the three months ended June 30, 2018.

 

General and administrative expenses: General and administrative expenses for the three months ended June 30, 2019 were $1.3 million, compared to $1.4 million for the same period in 2018.

 

Interest income: Interest income for the three months ended June 30, 2019 was $0.2 million which is unchanged from the three months ended June 30, 2018.

 

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Interest expense: Interest expense for the three months ended June 30, 2019 was $13.2 million, an increase of $0.7 million from $12.5 million for the three months ended June 30, 2018. The increase was mainly due to higher LIBOR during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.

 

Other finance expense: Other finance expense was $0.3 million for the three months ended June 30, 2019 and 2018. Other finance expense is primarily related to bank fees and guarantee commissions.

 

Realized and unrealized gain (loss) on derivative instruments: Realized and unrealized loss on derivative instruments for the three months ended June 30, 2019 was $10.3 million, compared to a gain of $2.0 million for the three months ended June 30, 2018, as set forth in the table below:

 

 

 

Three Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

Realized gain (loss):

 

 

 

 

 

Interest rate swap contracts

 

$

1,168

 

$

57

 

Foreign exchange forward contracts

 

(658

)

134

 

Total realized gain (loss):

 

510

 

191

 

Unrealized gain (loss):

 

 

 

 

 

Interest rate swap contracts

 

(11,521

)

2,995

 

Foreign exchange forward contracts

 

693

 

(1,218

)

Total unrealized gain (loss):

 

(10,828

)

1,777

 

Total realized and unrealized gain (loss) on derivative instruments:

 

$

(10,318

)

$

1,968

 

 

As of June 30, 2019, the total notional amount of the Partnership’s outstanding interest rate swap contracts that were entered into in order to hedge outstanding or forecasted debt obligations was $571.5 million and the Partnership had entered into foreign exchange forward contracts, selling a total notional amount of $20.0 million against the Norwegian Kroner (“NOK”) at an average exchange rate of NOK 8.45 per 1.0 U.S. Dollar, which are economic hedges for certain vessel operating expenses and general expenses in NOK. Of the unrealized loss for the three months ended June 30, 2019, $11.5 million is related to mark-to-market losses on interest rate swaps and an unrealized gain of $0.7 million is related to foreign exchange contracts. The unrealized losses in the three months ended June 30, 2019 were as a result of an decrease in the US swap interest rate.

 

Net loss on foreign currency transactions: Net loss on foreign currency transactions for the three months ended June 30, 2019 was $0.2 million compared to a gain of $0.3 million for the three months ended June 30, 2018.

 

Income tax (expense): Income tax expense for the three months ended June 30, 2019 and 2018 remained consistent at $3,000.

 

Net income: As a result of the foregoing, we earned net income of $8.2 million for the three months ended June 30, 2019 compared to net income of $21.7 million for the three months ended June 30,2018.

 

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Table of Contents

 

Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

Change

 

% Change

 

Time charter and bareboat revenues

 

$

141,456

 

$

136,608

 

$

4,848

 

4

%

Loss of hire insurance recoveries

 

 

450

 

(450

)

-100

%

Other income

 

15

 

750

 

(735

)

-98

%

Vessel operating expenses

 

29,757

 

27,221

 

2,536

 

9

%

Depreciation

 

44,860

 

43,906

 

954

 

2

%

General and administrative expenses

 

2,561

 

2,695

 

(134

)

-5

%

Interest income

 

471

 

296

 

175

 

59

%

Interest expense

 

(26,844

)

(23,119

)

3,725

 

16

%

Other finance expense

 

(404

)

(626

)

(222

)

-35

%

Realized and unrealized gain (loss) on derivative instruments

 

(16,247

)

11,944

 

28,191

 

-236

%

Net gain (loss) on foreign currency transactions

 

(218

)

(70

)

148

 

211

%

Income tax (expense)

 

(6

)

(6

)

 

0

%

Net income

 

21,045

 

52,405

 

(31,360

)

-60

%

 

Time Charter and Bareboat Revenues: Time charter and bareboat revenues increased by $4.8 million to $141.5 million for the six months ended June 30, 2019 compared to $136.6 million for the six months ended June 30, 2018. This was principally due to (i) increased revenues from the Anna Knutsen being included in the results of operations from March 1, 2018, (ii) receipt of the full earnings from the Brasil Knutsen during the six months ended June 30, 2019 compared to reduced earnings due to planned drydocking in the six months ended June 30, 2018.

 

Loss of hire insurance recoveries: Loss of hire insurance recoveries for the six months ended June 30, 2019 were $nil million compared to $0.5 million for the six months ended June 30, 2018. The loss of hire insurance recoveries in the six months ended June 30, 2018 were related to a technical default with Carmen Knutsen’s controllable pitch propeller.

 

Other income: Other income for the six months ended June 30, 2019 was $15,000 compared to $0.8 million for the six months ended June 30, 2018. The decrease was primarily due to guarantee income from KNOT related to the Windsor Knutsen, which ended in April 2018.

 

Vessel operating expenses: Vessel operating expenses for the six months ended June 30, 2019 were $29.8 million, an increase of $2.5 million from $27.2 million in the six months ended June 30, 2018. The increase was primarily due to (i) an increase of $0.9 million from the Anna Knutsen being included in the results of operations from March 1, 2018 and (ii) $2.3 million insurance recoveries received in connection with the propeller repairs of the Carmen Knutsen in the six months ended June 30, 2018. The increase was partially offset by reduced operating expenses for the Brasil Knutsen in the six months ended June 30, 2019 compared to the six months ended June 30, 2018 when the vessel had a scheduled drydocking and incurred $0.8 million related to bunkers consumption.

 

Depreciation: Depreciation expense for the six months ended June 30, 2019 was $44.9 million, an increase of $1.0 million from $43.9 million in the six months ended June 30, 2018. This increase was mainly due to the Anna Knutsen being included in the results of operations from March 1, 2018 and increased depreciation for the Ingrid Knutsen related to drydock additions.

 

General and administrative expenses: General and administrative expenses for the six months ended June 30, 2019 were $2.6 million, compared to $2.7 million for the six months ended June 30, 2018.

 

Interest income: Interest income for the six months ended June 30, 2019 was $0.5 million, compared to $0.3 million for the six months ended June 30, 2018.

 

Interest expense: Interest expense for the six months ended June 30, 2019 was $26.8 million, an increase of $3.7 million from $23.1 million in the six months ended June 30, 2018. The increase was mainly due to additional debt incurred in connection with the acquisition of the Anna Knutsen, higher LIBOR rate on average and increased leverage for the entire fleet.

 

Other finance expense: Other finance expense was $0.4 million for the six months ended June 30, 2019 compared to $0.6 million for the six months ended June 30, 2018. Other finance expense is primarily related to bank fees and guarantee commissions.

 

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Realized and unrealized gain (loss) on derivative instruments: Realized and unrealized loss on derivative instruments for the six months ended June 30, 2019 was $16.2 million, compared to a gain of $11.9 million for the six months ended June 30, 2018 as set forth in the table below:

 

 

 

Six Months Ended
June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

Realized gain (loss):

 

 

 

 

 

Interest rate swap contracts

 

$

2,246

 

$

(247

)

Foreign exchange forward contracts

 

(1,446

)

1,239

 

Total realized gain (loss):

 

800

 

992

 

Unrealized gain (loss):

 

 

 

 

 

Interest rate swap contracts

 

(18,619

)

11,942

 

Foreign exchange forward contracts

 

1,572

 

(990

)

Total unrealized gain (loss):

 

(17,047

)

10,952

 

Total realized and unrealized gain (loss) on derivative instruments:

 

$

(16,247

)

$

11,944

 

 

The decrease in net realized and unrealized gain on derivative instruments was mainly due to a decrease in the US swap interest rate.

 

Net loss on foreign currency transactions: Net loss on foreign currency transactions for the six months ended June 30, 2019 was $0.2 million, compared to $0.1 million loss for the six months ended June 30, 2018.

 

Income tax (expense): Income tax expense for the six months ended June 30, 2019 and 2018 was $6,000.

 

Net income: As a result of the foregoing, we earned net income of $21.0 million for the six months ended June 30, 2019 compared to net income of $52.4 million for the six months ended June 30, 2018.

 

Liquidity and Capital Resources

 

Liquidity and Cash Needs

 

We operate in a capital-intensive industry, and we expect to finance the purchase of additional vessels and other capital expenditures through a combination of borrowings from commercial banks, cash generated from operations and debt and equity financings. In addition to paying distributions, our other liquidity requirements relate to servicing our debt, funding investments (including the equity portion of investments in vessels), funding working capital and maintaining cash reserves against fluctuations in operating cash flows. We believe our current resources are sufficient to meet our working capital requirements for our current business. Generally, our long-term sources of funds are cash from operations, long-term bank borrowings and other debt and equity financings. Because we distribute our available cash, we expect to rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion capital expenditures.

 

Our funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity. Cash and cash equivalents are held primarily in U.S. Dollars with some balances held in NOK, British Pounds and Euros. We have not made use of derivative instruments other than for interest rate and currency risk management purposes. We expect to continue to economically hedge our exposure to interest rate fluctuations in the future by entering into interest rate swap contracts.

 

We estimate that we will spend in total approximately $42.6 million for drydocking and classification surveys for the twelve vessels under time charters in our fleet as of June 30, 2019 between 2019 and 2023. As our fleet matures and expands, our drydocking expenses will likely increase. Ongoing costs for compliance with environmental regulations are primarily included as part of our drydocking and society classification survey costs or are a component of our vessel operating expenses. We are not aware of any regulatory changes or environmental liabilities that we anticipate will have a material impact on our current or future operations. There will be further costs related to voyages to and from the drydocking yard that will depend on the distance from the vessel’s ordinary trading area to the drydocking yard.

 

On June 28, 2019, the Partnership extended the maturity of its unsecured revolving credit facility of $25 million with NTT Finance Corporation. The facility matures in August 2021, bears interest at LIBOR plus 1.8% and has a commitment fee of 0.5% on the undrawn portion of the facility.  The commercial terms of the facility are unchanged from the facility entered into in June 2017 with NTT Finance Corporation.

 

As of June 30, 2019, the Partnership had available liquidity of $71.1 million, which consisted of cash and cash equivalents of $42.4 million and undrawn capacity under the $55 million revolving credit facility of $28.7 million.

 

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The consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern. As of June 30, 2019, the Partnership’s net current liabilities were $52.3 million. Included in current liabilities are $83.3 million short term loan obligations that mature before June 30, 2020 and are therefore, presented as current debt.

 

The Partnership expects that its primary future sources of funds will be available cash, cash from operations, borrowings under any new loan agreements and the proceeds of any equity financings. The Partnership believes that these sources of funds (assuming the current rates earned from existing charters) will be sufficient to cover operational cash outflows and ongoing obligations under the Partnership’s financing commitments to pay loan interest and make scheduled loan repayments and to make distributions on its outstanding units. Accordingly, the Partnership believes that its current resources, including amounts available to be drawn under the revolving credit facilities of $28.7 million, are sufficient to meet working capital requirements for its current business for at least the next twelve months.

 

The following table summarizes our net cash flows from operating, investing and financing activities and our cash and cash equivalents for the periods presented:

 

Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars in thousands)

 

2019

 

2018

 

Net cash provided by (used in) operating activities

 

$

82,021

 

$

78,234

 

Net cash provided by (used in) investing activities

 

 

(15,386

)

Net cash provided by (used in) financing activities

 

(81,308

)

(63,823

)

Effect of exchange rate changes on cash

 

4

 

(45

)

Net increase in cash and cash equivalents

 

717

 

(1,019

)

Cash and cash equivalents at the beginning of the period

 

41,712

 

46,104

 

Cash and cash equivalents at the end of the period

 

42,429

 

45,085

 

 

Net cash provided by operating activities

 

Net cash provided by operating activities increased by $3.8 million to $82.0 million in the six months ended June 30, 2019 compared to $78.2 million in the six months ended June 30, 2018. The increase was primarily due to higher earnings from the Anna Knutsen being included in the results of operations from March 1, 2018 and an increase in working capital.

 

Net cash used in investing activities

 

Net cash used in investing activities was $nil million in the six months ended June 30, 2019 compared to $15.4 million in the six months ended June 30, 2018. Net cash used in investing activities for the six months ended June 30, 2019 decreased compared to the six months ended June 30, 2018 because we had no vessel acquisitions in 2019.

 

Net cash used in financing activities

 

Net cash used in financing activities during the six months ended June 30, 2019 of $81.3 million mainly related to the following:

 

·                  Repayment of long-term debt of $41.7 million; and

 

·                  Payment of cash distributions of $39.7 million.

 

Net cash used in financing activities during the six months ended June 30, 2018 of $63.8 million mainly related to the following:

 

·                  Proceeds of $100 million from the refinancing of the Torill Knutsen credit facility ; and

 

·                  Proceeds from drawdowns under the two revolving credit facilities of $45.5 million.

 

This was offset by the following:

 

·                  Repayment of long-term debt of $146.0 million, of which $73.2 million was repaid in connection with refinancing of the Torill Knutsen credit facility ;

 

·                  Repayment of long-term debt from related parties of $22.5 million; and

 

·                  Payment of cash distributions of $39.7 million.

 

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Table of Contents

 

Borrowing Activities

 

Long-Term Debt

 

As of June 30, 2019, and December 31, 2018, the Partnership had the following debt amounts outstanding:

 

(U.S. Dollars in thousands)

 

Vessel

 

June 30,
2019

 

December 31,
2018

 

$320 million loan facility

 

Windsor Knutsen, Bodil Knutsen, Carmen Knutsen, Fortaleza Knutsen, Recife Knutsen, Ingrid Knutsen

 

$

297,416

 

$

312,472

 

$55 million revolving credit facility

 

 

 

26,279

 

26,279

 

Hilda loan facility

 

Hilda Knutsen

 

87,692

 

90,769

 

Torill loan facility

 

Torill Knutsen

 

91,667

 

95,000

 

$172.5 million loan facility

 

Dan Cisne, Dan Sabia

 

76,839

 

81,839

 

Raquel loan facility

 

Raquel Knutsen

 

60,569

 

63,184

 

Tordis loan facility

 

Tordis Knutsen

 

83,461

 

85,991

 

Vigdis loan facility

 

Vigdis Knutsen

 

84,726

 

87,256

 

Lena loan facility

 

Lena Knutsen

 

83,300

 

85,750

 

Brasil loan facility

 

Brasil Knutsen

 

60,423

 

63,454

 

Anna loan facility

 

Anna Knutsen

 

68,314

 

70,353

 

$25 million revolving credit facility

 

 

 

25,000

 

25,000

 

Total long-term debt

 

 

 

1,045,686

 

1,087,347

 

Less: current installments

 

 

 

85,845

 

109,534

 

Less: unamortized deferred loan issuance costs

 

 

 

2,560

 

2,608

 

Current portion of long-term debt

 

 

 

83,285

 

106,926

 

Amounts due after one year

 

 

 

959,841

 

977,813

 

Less: unamortized deferred loan issuance costs

 

 

 

6,161

 

7,448

 

Long-term debt, less current installments, and unamortized deferred loan issuance costs

 

 

 

$

953,680

 

$

970,365

 

 

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The Partnership’s outstanding debt of $1,045.7 million as of June 30, 2019 is repayable as follows:

 

(U.S. Dollars in thousands)

 

Period repayment

 

Balloon repayment

 

Remainder of 2019

 

$

42,873

 

$

 

2020

 

85,945

 

 

2021

 

86,545

 

95,811

 

2022

 

71,210

 

236,509

 

2023

 

55,535

 

202,185

 

2024 and thereafter

 

15,180

 

153,893

 

Total

 

$

357,288

 

$

688,398

 

 

As of June 30, 2019, the interest rates on our loan agreements were LIBOR plus a fixed margin ranging from 1.8% to 2.4%.

 

$320 Million Term Loan Facility and $55 Million Revolving Credit Facility

 

In September 2018, the Partnership’s subsidiaries which own the Windsor Knutsen, the Bodil Knutsen, the Fortaleza Knutsen, the Recife Knutsen, the Carmen Knutsen and the Ingrid Knutsen (“the Vessels”), entered into new senior secured credit facilities (the “Multi-vessels Facility”) in order to refinance their existing long term bank debt. The Multi-vessels Facility consists of a term loan of $320 million and a $55 million revolving credit facility. The term loan is repayable in 20 consecutive quarterly installments, with a final payment at maturity in September 2023 of $177 million, which includes the balloon payment and last quarterly installment. The term loan bears interest at a rate per annum equal to LIBOR plus a margin of 2.125%. The revolving credit facility will mature in September 2023, and bears interest at LIBOR plus a margin of 2.125%. There is a commitment fee of 0.85% payable on the undrawn portion of the revolving credit facility. The loans are guaranteed by the Partnership and secured by mortgages on the Vessels. The Multi-vessels Facility refinanced the $220 million facility, the $35 million revolving credit facility, the Fortaleza and Recife loan facility and the Ingrid loan facility.

 

The Vessels, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Multi-vessel facility. The Partnership and the borrowers (except for the Partnership subsidiary that owns the Recife Knutsen and the Fortaleza Knutsen ) are guarantors, and the Multi-vessels Facility is secured by vessel mortgages on the Windsor Knutsen, the Bodil Knutsen, the Fortaleza Knutsen, the Recife Knutsen, the Carmen Knutsen and the Ingrid Knutsen.

 

The Multi-vessels Facility contains the following financial covenants:

 

·                  The aggregate market value of the Vessels shall not be less than 125% of the outstanding balance under the Multi-vessels Facility;

 

·                  Positive working capital of the borrowers and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 8 vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 12 additional vessels in excess of 8 vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Multi-vessels Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrowers and the guarantors were in compliance with all covenants under this facility.

 

Hilda Loan Facility

 

In May 2017, the Partnership’s subsidiary, Knutsen Shuttle Tankers 14 AS, which owns the vessel Hilda Knutsen , entered into a new $100 million senior secured term loan facility with Mitsubishi UFJ Lease & Finance (Hong Kong) Limited (the “New Hilda Facility”). The New Hilda Facility replaced the $117 million loan facility, which was due to be paid in full in August 2018. The New Hilda Facility is repayable in 28 consecutive quarterly installments with a final payment at maturity of $58.5 million, which includes the balloon payment and last quarterly installment. The New Hilda Facility bears interest at a rate per annum equal to LIBOR plus a margin of 2.2%. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors. The facility matures in May 2024.

 

The Hilda Facility contains the following primary financial covenants:

 

·                  Market value of the Hilda Knutsen shall not be less than 110% of the outstanding balance under the Hilda Facility for the first two years, 120% for the third and fourth year, and 125% thereafter;

 

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·                  Positive working capital of the borrower and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1 million for each additional vessel acquired by the Partnership in excess of eight vessels and $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Hilda Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

Torill Loan Facility

 

In January 2018, the Partnership’s subsidiary, Knutsen Shuttle Tankers 15 AS, which owns the vessel Torill Knutsen , entered into a new $100 million senior secured term loan facility (the “Torill Facility”) with a consortium of banks, in which The Bank of Tokyo-Mitsubishi UFJ acted as agent. The Torill Facility replaced a $117 million secured loan facility, which was due to be paid in full in October 2018. The Torill Facility is repayable in 24 consecutive quarterly installments with a balloon payment of $60.0 million due at maturity. The Torill Facility bears interest at a rate per annum equal to LIBOR plus a margin of 2.1%. The facility will mature in January 2024 and is guaranteed by the Partnership.

 

The Torill Facility contains the following primary financial covenants:

 

·                  Market value of the Torill Knutsen shall not be less than 110% of the outstanding balance under the Torill Facility for the first two years, 120% for the third and fourth year, and 125% thereafter;

 

·                  Positive working capital of the borrower and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 8 vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract in excess of 8 vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Torill Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

$172.5 Million Secured Loan Facility

 

In April 2014, KNOT Shuttle Tankers 20 AS and KNOT Shuttle Tankers 21 AS, the subsidiaries owning the Dan Cisne and Dan Sabia , as the borrowers, entered into a $172.5 million senior secured loan facility. In connection with the Partnership’s acquisition of the Dan Cisne , in December 2014, the $172.5 million senior secured loan facility was split into a tranche related to the Dan Cisne (the “Dan Cisne Facility”) and a tranche related to Dan Sabia (the “Dan Sabia Facility”).

 

The Dan Cisne Facility and the Dan Sabia Facility are guaranteed by the Partnership and secured by a vessel mortgage on the Dan Cisne and Dan Sabia . The Dan Cisne Facility and the Dan Sabia Facility bear interest at LIBOR plus a margin of 2.4% and are repayable in semiannual installments with a final balloon payment due at maturity in September 2023 and January 2024, respectively.

 

The Dan Cisne Facility and Dan Sabia Facility contain the following financial covenants:

 

·                  Market value of each of the Dan Cisne and Dan Sabia shall not be less than 100% of the outstanding balance under the Dan Cisne Facility and Dan Sabia Facility, respectively, for the first three years, and 125% thereafter;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1 million for each additional vessel acquired by the Partnership in excess of eight vessels and $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract; and

 

·                  Minimum book equity ratio for the Partnership of 30%.

 

The facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrowers and the guarantor were in compliance with all covenants under this facility.

 

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Raquel Loan Facility

 

In December 2014, Knutsen Shuttle Tankers 19 AS, the subsidiary owning the Raquel Knutsen , as the borrower, entered into a secured loan facility in an aggregate amount of $90.0 million (the “Raquel Facility”). The Raquel Facility is repayable in quarterly installments with a final balloon payment of $30.5 million due at maturity in March 2025. The Raquel Facility bears interest at an annual rate equal to LIBOR plus a margin of 2.0%. The facility is secured by a vessel mortgage on the Raquel Knutsen . The Raquel Knutsen , assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Raquel Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors.

 

The Raquel Facility contains the following financial covenants:

 

·                  Market value of the Raquel Knutsen shall not be less than 100% of the of the outstanding balance under the Raquel Facility for the first three years, and 125% thereafter;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1 million for each additional vessel acquired by the Partnership in excess of eight vessels and $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract; and

 

·                  Minimum book equity ratio for the Partnership of 30%.

 

The Raquel Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

Tordis Loan Facility

 

In April 2015, KNOT Shuttle Tankers 24 AS, the subsidiary owning the Tordis Knutsen, as the borrower, entered into a secured loan facility (the “Tordis Facility”). As of the time of the acquisition of the Tordis Knutsen on March 1, 2017, the aggregate amount outstanding under the facility was $114.4 million. The Tordis Facility is repayable in quarterly installments with a final balloon payment of $70.8 million due at maturity in November 2021. The Tordis Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.9%. The facility is secured by a vessel mortgage on the Tordis Knutsen . The Tordis Knutsen , assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Tordis Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors.

 

The Tordis Facility contains the following financial covenants:

 

·                  Aggregate market value of the Tordis Knutsen, the Vigdis Knutsen and the Lena Knutsen shall not be less than 130% of the aggregate outstanding balance under the Tordis Facility, the Vigdis Facility and the Lena Facility at any time;

 

·                  Positive working capital of the borrower and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 8 vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract in excess of 8 vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Tordis Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

Vigdis Loan Facility

 

In April 2015, KNOT Shuttle Tankers 25 AS, the subsidiary owning the Vigdis Knutsen, as the borrower, entered into a secured loan facility (the “Vigdis Facility”). The Vigdis Facility is repayable in quarterly installments with a final balloon payment of $70.8 million due at maturity in February 2022. The Vigdis Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.9%. The facility is secured by a vessel mortgage on the Vigdis Knutsen . The Vigdis Knutsen, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Vigdis Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors.

 

The Vigdis Facility contains the following financial covenants:

 

·                  Aggregate market value of the Tordis Knutsen, the Vigdis Knutsen and the Lena Knutsen shall not be less than 130% of the aggregate outstanding balance under the Tordis Facility, the Vigdis Facility and the Lena Facility at any time;

 

·                  Positive working capital of the borrower and the Partnership;

 

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·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 8 vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract in excess of 8 vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Vigdis Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

Lena Loan Facility

 

In April 2015, KNOT Shuttle Tankers 26 AS, the subsidiary owning the Lena Knutsen , as the borrower, entered into a secured loan facility (the “Lena Facility”). The Lena Facility is repayable in quarterly installments with a final balloon payment of $68.6 million due at maturity in June 2022. The Lena Facility bears interest at an annual rate equal to LIBOR plus a margin of 1.9%. The facility is secured by a vessel mortgage on the Lena Knutsen . The Lena Knutsen , assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Lena Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors.

 

The Lena Facility contains the following financial covenants:

 

·                  Aggregate market value of the Tordis Knutsen, the Vigdis Knutsen and the Lena Knutsen shall not be less than 130% of the aggregate outstanding balance under the Tordis Facility, the Vigdis Facility and the Lena Facility at any time;

 

·                  Positive working capital of the borrower and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 8 vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract in excess of 8 vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Lena Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

Brasil Loan Facility

 

In June 2017, KNOT Shuttle Tankers 32 AS, the subsidiary owning the Brasil Knutsen , as the borrower, entered into a secured loan facility (the “Brasil Facility”). The Brasil Facility is repayable in quarterly installments with a final balloon payment of $40.0 million due at maturity in July 2022. The Brasil Facility bears interest at an annual rate equal to LIBOR plus a margin of 2.3%. The facility is secured by a vessel mortgage on the Brasil Knutsen . The Brasil Knutsen , assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Brasil Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors.

 

The Brasil Facility contains the following financial covenants:

 

·                  Market value of the Brasil Knutsen shall not be less than 125% of the of the outstanding balance under the Brasil Facility for the first four years, and 135% thereafter;

 

·                  Positive working capital of the borrower and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to a total of eight (8) vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to a total of twelve (12) vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Brasil Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

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Anna Loan Facility

 

In September 2016, KNOT Shuttle Tankers 30 AS, the subsidiary owning the Anna Knutsen, as the borrower, entered into a secured loan facility (the “Anna Facility”). The Anna Facility is repayable in quarterly installments with a final balloon payment of $57.1 million due at maturity in March 2022. The Anna Facility bears interest at an annual rate equal to LIBOR plus a margin of 2.0%. The facility is secured by a vessel mortgage on the Anna Knutsen . The Anna Knutsen , assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Anna Facility. The Partnership and KNOT Shuttle Tankers AS are the sole guarantors

 

The Anna Facility contains the following financial covenants:

 

·                  Market value of the Anna Knutsen shall not be less than 130% of the aggregate outstanding balance under the Anna Facility at any time;

 

·                  Positive working capital of the borrower and the Partnership;

 

·                  Minimum liquidity of the Partnership of $15 million plus increments of $1.5 million for each owned vessel with less than 12 months remaining tenor on its employment contract up to 8 vessels and $1 million for each owned vessel with less than 12 months remaining tenor on its employment contract in excess of 8 vessels;

 

·                  Minimum book equity ratio for the Partnership of 30%; and

 

·                  Minimum EBITDA to interest ratio for the Partnership of 2.50.

 

The Anna Facility also identifies various events that may trigger mandatory reduction, prepayment and cancellation of the facility, including total loss or sale of a vessel and customary events of default. As of June 30, 2019, the borrower and the guarantors were in compliance with all covenants under this facility.

 

$25 Million Revolving Credit Facility

 

On June 28, 2019, KNOT Shuttle Tankers AS extended the maturity of its unsecured revolving credit facility of $25 million with NTT Finance Corporation. The facility matures in August 2021, bears interest at LIBOR plus a margin of 1.8% and has a commitment fee of 0.5% on the undrawn portion of the facility. The commercial terms of the facility are unchanged from the facility entered into in June 2017 with NTT Finance Corporation.

 

Derivative Instruments and Hedging Activities

 

We use derivative instruments to reduce the risks associated with fluctuations in interest rates. We have a portfolio of interest rate swap contracts that exchange or swap floating rate interest to fixed rates, which, from a financial perspective, hedges our obligations to make payments based on floating interest rates. As of June 30, 2019, the Partnership’s net exposure to floating interest rate fluctuations on its outstanding debt was approximately $431.8 million based on total interest-bearing debt outstanding of $1,045.7 million, less interest rate swaps of $571.5 million and less cash and cash equivalents of $42.4 million. Our interest rate swap contracts mature between July 2020 and August 2027. Under the terms of the interest rate swap agreements, we will receive from the counterparty interest on the notional amount based on three-month and six-month LIBOR and will pay to the counterparty a fixed rate. For the interest rate swap agreements above, we will pay to the counterparty a weighted average interest rate of 1.88%.

 

We enter into foreign exchange forward contracts in order to manage our exposure to the risk of movements in foreign currency exchange rate fluctuations. As of June 30, 2019, the total contract amount in foreign currency of our outstanding foreign exchange forward contracts that were entered into to economically hedge our outstanding future payments in currencies other than the U.S. Dollar was NOK 169.0 million. We do not apply hedge accounting for derivative instruments.

 

Contractual Obligations

 

The following table summarizes our long-term contractual obligations as of June 30, 2019:

 

 

 

Payments Due by Period

 

(U.S. Dollars in
thousands)

 

Total

 

Less than
1 Year

 

1-3 Years

 

4-5 Years

 

More than
5 Years

 

Long-term debt

 

$

1,045,686

 

$

85,845

 

$

460,596

 

$

464,823

 

$

34,422

 

Interest commitments on long-term debt (1)

 

155,792

 

47,172

 

77,552

 

30,350

 

718

 

Interest rate swaps (2)

 

(5,516

)

(922

)

475

 

(3,171

)

(1,898

)

Total

 

$

1,195,962

 

$

132,095

 

$

538,623

 

$

492,002

 

$

33,242

 

 

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(1)                   The long-term debt obligations have been calculated assuming interest rates based on the 6-month LIBOR as of June 30, 2019, plus the applicable margin for all periods presented.

(2)                   We have entered into interest rate swap contracts and under the terms of the interest rate swap contracts, we receive LIBOR-based variable interest and payments and make fixed interest rate payments. The interest commitments on interest rate swaps have been calculated assuming interest rates based on the 6-month LIBOR as of June 30, 2019.

 

Off-Balance Sheet Arrangements

 

Currently, we do not have any off-balance sheet arrangements.

 

Critical Accounting Estimates

 

The preparation of the unaudited condensed consolidated interim financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and liabilities. We base these estimates and assumptions on historical experience and on various other information and assumptions that we believe to be reasonable. Our critical accounting estimates are important to the portrayal of both our financial condition and results of operations and require us to make subjective or complex assumptions or estimates about matters that are uncertain. For a description of our material accounting policies that involve higher degree of judgment, please read Note 2—Summary of Significant Accounting Policies of our consolidated financial statements included in our 2018 20-F filed with the SEC.

 

Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to various market risks, including interest rate, foreign currency exchange rate and concentration of credit risks. Historically, we have entered into certain derivative instruments and contracts to maintain the desired level of exposure arising from interest rate and certain foreign currency exchange rate risks. Our policy is to economically hedge our exposure to risks, where possible, within boundaries deemed appropriate by management.

 

Interest Rate Risk

 

A portion of our debt obligations and surplus funds placed with financial institutions are subject to movements in interest rates. It is our policy to obtain the most favorable interest rates available without increasing our foreign currency exposure. In keeping with this, our surplus funds may in the future be placed in fixed deposits with reputable financial institutions that yield better returns than bank deposits. The deposits generally have short-term maturities so as to provide us with the flexibility to meet working capital and capital investments.

 

We have historically used interest rate swap contracts to manage our exposure to interest rate risks. Interest rate swap contracts were used to convert floating rate debt obligations based on LIBOR to a fixed rate in order to achieve an overall desired position of fixed and floating rate debt. The extent to which interest rate swap contracts are used is determined by reference to our net debt exposure and our views regarding future interest rates. Our interest rate swap contracts do not qualify for hedge accounting, and movements in their fair values are reflected in the statements of operations under “Realized and unrealized gain (loss) on derivative instruments.” Interest rate swap contracts that have a positive fair value are recorded as “Other current assets,” while swaps with a negative fair value are recorded as “Derivative liabilities.”

 

As of June 30, 2019, we were party to interest rate swap contracts with a combined notional amount of approximately $571.5 million. Under the terms of the interest rate swap contracts, we receive LIBOR-based variable interest rate payments and make fixed interest rate payments at fixed rates between 1.38% per annum and 2.90% per annum for all periods. The interest rate swap contracts mature between July 2020 and August 2027. The notional amount and fair value of our interest rate swap contracts recognized as net derivative liabilities as of June 30, 2019 are as follows:

 

 

 

June 30, 2019

 

(U.S. Dollars in thousands)

 

Notional
Amount

 

Fair Value
(asset)

 

Interest rate swap contracts

 

$

571,496

 

$

2,676

 

 

As of June 30, 2019, our net exposure to floating interest rate fluctuations on our outstanding debt was approximately $431.8 million based on total interest-bearing debt outstanding of $1,045.7 million, less interest rate swaps of $571.5 million and less cash and cash equivalents of $42.4 million. A 1% change in short-term interest rates would result in an increase or decrease to our interest expense of approximately $4.3 million on an annual basis as of June 30, 2019.

 

Foreign Currency Exchange Rate Risk

 

We and our subsidiaries have the U.S. Dollar as our functional and reporting currency, because all of our revenues and the majority of our expenditures, including the majority of our investments in vessels and our financing transactions, are denominated in U.S. Dollars. We could, however, earn revenue in other currencies, and we currently incur a portion of our expenses in other currencies. Therefore, there is a risk that currency fluctuations could have an adverse effect on the value of our cash flows.

 

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Our foreign currency risk arises from:

 

·                  the measurement of monetary assets and liabilities denominated in foreign currencies converted to U.S. Dollars, with the resulting gain or loss recorded as “Net loss on foreign currency transactions;” and

 

·                  the impact of fluctuations in exchange rates on the reported amounts of our revenues, if any, and expenses that are denominated in foreign currencies.

 

As of June 30, 2019, we had entered into foreign exchange forward contracts, selling a total notional amount of $20.0 million against NOK at an average exchange rate of NOK 8.45 per 1 U.S. Dollar, which are economic hedges for certain vessel operating expenses and general expenses in NOK. We did not apply hedge accounting to our foreign exchange forward contracts.

 

Concentration of Credit Risk

 

The market for our services is the offshore oil transportation industry, and our customers consist primarily of major oil and gas companies, independent oil and gas producers and government-owned oil companies. As of June 30, 2019, and December 31, 2018, seven customers accounted for substantially all of our revenues. Ongoing credit evaluations of our customers are performed and generally do not require collateral in our business agreements. Typically, under our time charters and bareboat charters, the customer pays for the month’s charter the first day of each month, which reduces our level of credit risk. Provisions for potential credit losses are maintained when necessary.

 

We have bank deposits that expose us to credit risk arising from possible default by the counterparty. We manage the risk by using credit-worthy financial institutions.

 

Retained Risk

 

For a description of our insurance coverage, including the risks retained by us related to our insurance policies, please read “Item 4. Information on the Partnership—Business Overview—Risk of Loss, Insurance and Risk Management” in our 2018 20-F.

 

Risk Factors

 

In addition to the other information set forth below and elsewhere in this Report on Form 6-K, you should carefully consider the risk factors discussed in “Item 3. Key Information—Risk Factors” in our 2018 20-F, which could materially affect our business, financial condition or results of operations.

 

Because we and KNOT UK are Marshall Islands entities, our operations may be subject to economic substance requirements of the European Union, which could harm our business.

 

On December 5, 2017, following an assessment of the tax policies of various countries by the Code of Conduct Group for Business Taxation of the European Union (the “COCG”), the Council of the European Union (the “Council”) approved and published Council conclusions containing a list of “non-cooperative jurisdictions” for tax purposes (the “2017 Conclusions”). On March 12, 2019, the Council adopted a revised list of non-cooperative jurisdictions (the “2019 Conclusions”). In the 2019 Conclusions, the Republic of the Marshall Islands, among others, was placed by the E.U. on its list of non-cooperative jurisdictions for tax purposes for failing to implement certain commitments previously made to the E.U. by the agreed deadline. E.U. member states have agreed upon a set of measures, which they can choose to apply against the listed countries, including increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The European Commission has stated it will continue to support member states’ efforts to develop a more coordinated approach to sanctions for the listed countries in 2019. E.U. legislation prohibits E.U. funds from being channeled or transited through entities in non-cooperative jurisdictions. In July 2019, the Registrar of Corporations for the Republic of the Marshall Islands announced that the Republic of the Marshall Islands expects to be removed from the blacklist following the September and October meetings of the EU Code of Conduct Group and the Economic and Financial Affairs Council. However, it is not assured that such removal will occur at that time, or at all.

 

We are a Marshall Islands partnership and KNOT UK is a Marshall Islands limited liability company. At present, the impact of being included on the list of non-cooperative jurisdictions for tax purposes is unclear. New regulations adopted in the Marshall Islands (which came into force on January 1, 2019) require certain entities that carry out particular activities to comply with an economic substance test whereby the entity must show that it (i) is directed and managed in the Marshall Islands in relation to that relevant activity, (ii) carries out core income-generating activity in relation to that relevant activity in the Marshall Islands and (iii) having regard to the level of relevant activity carried out in the Marshall Islands has (a) an adequate amount of expenditures in the Marshall Islands, (b) adequate physical presence in the Marshall Islands and (c) an adequate number of qualified employees in the Marshall Islands.

 

If we fail to comply with our obligations under this legislation or any similar law applicable to us in any other jurisdictions, we could be subject to financial penalties and spontaneous disclosure of information to foreign tax officials, or could be struck from the register of companies. Any of the foregoing could be disruptive to our business and could have a material adverse effect on our business, financial conditions and operating results

 

We do not know: if the E.U. will remove the Marshall Islands from the list of non-cooperative jurisdictions; what additional actions the Marshall Islands may take, if any, to remove itself from the list; how quickly the E.U. will react to changes in legislation of the Marshall Islands; or how E.U. banks or other counterparties will react while we or KNOT UK remain as entities organized and existing under the laws of

 

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the Marshall Islands. The effect of the E.U. list of non-cooperative jurisdictions, and any noncompliance by us with legislation adopted by the Marshall Islands to achieve removal from the list, could have a material adverse effect on our business, financial conditions and operating results.

 

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FORWARD-LOOKING STATEMENTS

 

This Report on Form 6-K contains certain forward-looking statements concerning future events and our operations, performance and financial condition and assumptions related thereto. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” “plan,” “intend” or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements include statements with respect to, among other things:

 

·                  market trends in the shuttle tanker or general tanker industries, including hire rates, factors affecting supply and demand, and opportunities for the profitable operations of shuttle tankers;

 

·                  KNOT’s and our ability to build shuttle tankers and the timing of the delivery and acceptance of any such vessels by their respective charterers;

 

·                  forecasts of our ability to make or increase distributions on our common units and to make distributions on the Series A Preferred Units and the amount of any such distributions;

 

·                  our ability to integrate and realize the expected benefits from acquisitions.

 

·                  our anticipated growth strategies;

 

·                  the effects of a worldwide or regional economic slowdown;

 

·                  turmoil in the global financial markets;

 

·                  fluctuations in currencies and interest rates;

 

·                  fluctuations in the price of oil;

 

·                  general market conditions, including fluctuations in hire rates and vessel values;

 

·                  changes in our operating expenses, including drydocking and insurance costs and bunker prices;

 

·                  our future financial condition or results of operations and future revenues and expenses;

 

·                  the repayment of debt and settling of any interest rate swaps;

 

·                  our ability to make additional borrowings and to access debt and equity markets;

 

·                  planned capital expenditures and availability of capital resources to fund capital expenditures;

 

·                  our ability to maintain long-term relationships with major users of shuttle tonnage;

 

·                  our ability to leverage KNOT’s relationships and reputation in the shipping industry;

 

·                  our ability to purchase vessels from KNOT in the future;

 

·                  our continued ability to enter into long-term charters, which we define as charters of five years or more;

 

·                  our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term charter;

 

·                  the financial condition of our existing or future customers and their ability to fulfill their charter obligations;

 

·                  timely purchases and deliveries of newbuilds;

 

·                  future purchase prices of newbuilds and secondhand vessels;

 

·                  any impairment of the value of our vessels;

 

·                  our ability to compete successfully for future chartering and newbuild opportunities;

 

·                  acceptance of a vessel by its charterer;

 

·                  termination dates and extensions of charters;

 

·                  the expected cost of, and our ability to comply with, governmental regulations, maritime self-regulatory organization standards, as well as standard regulations imposed by our charterers applicable to our business;

 

·                  availability of skilled labor, vessel crews and management;

 

·                  our general and administrative expenses and fees and expenses payable under the technical management agreements, the management and administration agreements and the administrative services agreement;

 

·                  the anticipated taxation of KNOT Offshore Partners and distributions to our unitholders;

 

·                  estimated future maintenance and replacement capital expenditures;

 

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·                  Marshall Islands economic substance requirements;

 

·                  our ability to retain key employees;

 

·                  customers’ increasing emphasis on environmental and safety concerns;

 

·                  potential liability from any pending or future litigation;

 

·                  potential disruption of shipping routes due to accidents, political events, piracy or acts by terrorists;

 

·                  future sales of our securities in the public market;

 

·                  our business strategy and other plans and objectives for future operations; and

 

·                  other factors listed from time to time in the reports and other documents that we file with the SEC.

 

Forward-looking statements in this Report on Form 6-K are based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties, including those risks discussed in this Form 6-K and our 2018 20-F. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. We do not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.

 

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EXHIBITS

 

The following exhibits are filed as part of this report:

 

Exhibit
Number

 

Description

 

 

 

101

 

The following financial information from KNOT Offshore Partners LP’s Report on Form 6-K for the quarter ended June 30, 2019 formatted in XBRL (eXtensible Business Reporting Language):

 

(i) Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018;

 

(ii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018;

 

(iii) Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018;

 

(iv) Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital for the Three and Six Months Ended June 30, 2019 and 2018;

 

(v) Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018; and

 

(vi) Notes to Unaudited Condensed Consolidated Financial Statements.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

KNOT OFFSHORE PARTNERS LP

 

 

 

 

Date: August 28, 2019

By:

/s/ Gary Chapman

 

 

Name:

Gary Chapman

 

 

Title:

Chief Executive Officer and Chief Financial Officer

 

43


v3.19.2
Document and Entity Information
6 Months Ended
Jun. 30, 2019
Document And Entity Information  
Document Type 6-K
Amendment Flag false
Document Period End Date Jun. 30, 2019
Document Fiscal Year Focus 2019
Document Fiscal Period Focus H1
Entity Registrant Name KNOT Offshore Partners LP
Entity Central Index Key 0001564180
Current Fiscal Year End Date --12-31
v3.19.2
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Operating revenues: (Notes 3, 4 and 13)        
Time charter and bareboat revenues $ 70,908 $ 69,221 $ 141,456 $ 136,608
Loss of hire insurance recoveries   450   450
Other income 14 94 15 750
Total revenues 70,922 69,765 141,471 137,808
Operating expenses: (Note 4 and 13)        
Vessel operating expenses 15,301 13,974 29,757 27,221
Depreciation 22,429 22,332 44,860 43,906
General and administrative expenses 1,264 1,350 2,561 2,695
Total operating expenses 38,994 37,656 77,178 73,822
Operating income 31,928 32,109 64,293 63,986
Finance income (expense): (Note 13)        
Interest income 233 161 471 296
Interest expense (Note 6) (13,186) (12,526) (26,844) (23,119)
Other finance expense (Note 6) (286) (288) (404) (626)
Realized and unrealized gain (loss) on derivative instruments (Note 7) (10,318) 1,968 (16,247) 11,944
Net gain (loss) on foreign currency transactions (192) 260 (218) (70)
Total finance expense (23,749) (10,425) (43,242) (11,575)
Income before income taxes 8,179 21,684 21,051 52,411
Income tax (expense) (Notes 9) (3) (3) (6) (6)
Net income 8,176 21,681 21,045 52,405
Series A Preferred unitholders' interest in net income 1,800 1,800 3,600 3,600
General Partner's interest in net income 118 367 322 901
Limited Partners' interest in net income $ 6,258 $ 19,514 $ 17,123 $ 47,904
Earnings per unit (Basic): (Note 15)        
General Partner unit (diluted) $ 0.191 $ 0.597 $ 0.524 $ 1.465
Earnings per unit (Diluted): (Note 15)        
General Partner unit (diluted) 0.191 0.597 0.524 1.465
Common Units        
Earnings per unit (Basic): (Note 15)        
Common unit (basic) 0.191 0.597 0.524 1.465
Earnings per unit (Diluted): (Note 15)        
Common unit (diluted) $ 0.191 $ 0.585 $ 0.524 $ 1.415
v3.19.2
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Condensed Consolidated Statements of Comprehensive Income        
Net income $ 8,176 $ 21,681 $ 21,045 $ 52,405
Comprehensive income $ 8,176 $ 21,681 $ 21,045 $ 52,405
v3.19.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents (Note 8) $ 42,429 $ 41,712
Amounts due from related parties (Note 13) 1,504 1,141
Inventories 2,439 2,443
Derivative assets (Notes 7 and 8) 1,981 4,621
Other current assets 2,537 2,462
Total current assets 50,890 52,379
Long-term assets:    
Vessels, net of accumulated depreciation (Note 10) 1,722,151 1,767,080
Right-of-use assets (Note 4) 2,075  
Intangible assets, net (Note 11) 1,589 1,891
Derivative assets (Notes 7 and 8) 914 11,667
Accrued income 4,374 3,807
Total long term assets 1,731,103 1,784,445
Total assets 1,781,993 1,836,824
Current liabilities:    
Trade accounts payable (Note 13) 2,981 4,800
Accrued expenses 6,293 6,464
Current portion of long-term debt (Notes 8 and 12) 83,285 106,926
Current lease liabilities (Note 4) 558  
Current portion of derivative liabilities (Notes 7 and 8) 426 1,740
Income taxes payable 18 130
Current portion of contract liabilities 1,518 1,518
Prepaid charter 6,891 5,771
Amount due to related parties (Note 13) 1,189 1,070
Total current liabilities 103,159 128,419
Long-term liabilities:    
Long-term debt (Notes 8 and 12) 953,680 970,365
Lease liabilities (Note 4) 1,516  
Derivative liabilities (Notes 7 and 8) 5,314 345
Contract liabilities 4,445 5,203
Deferred tax liabilities (Note 9) 463 453
Total long-term liabilities 965,418 976,366
Total liabilities 1,068,577 1,104,785
Commitments and contingencies (Note 14)
Series A Convertible Preferred Units 89,264 89,264
Partners' capital:    
Common unitholders 612,965 631,244
General partner interest 11,187 11,531
Total partners' capital 624,152 642,775
Total liabilities and equity $ 1,781,993 $ 1,836,824
v3.19.2
Condensed Consolidated Statements of Changes in Partners' Capital - USD ($)
$ in Thousands
General Partner Unit
Common Units
Total
Beginning balance at Dec. 31, 2017 $ 11,479 $ 628,471 $ 639,950
Net income 901 47,904 48,805
Cash distributions (666) (35,402) (36,068)
Net proceeds from issuance of common units   (4) (4)
Ending balance at Jun. 30, 2018 11,714 640,969 652,683
Convertible preferred units, beginning balance at Dec. 31, 2017     89,264
Net income     3,600
Cash distributions     (3,600)
Convertible preferred units, ending balance at Jun. 30, 2018     89,264
Beginning balance at Mar. 31, 2018 11,680 639,156 650,836
Net income 367 19,514 19,881
Cash distributions (333) (17,701) (18,034)
Ending balance at Jun. 30, 2018 11,714 640,969 652,683
Convertible preferred units, beginning balance at Mar. 31, 2018     89,264
Net income     1,800
Cash distributions     (1,800)
Convertible preferred units, ending balance at Jun. 30, 2018     89,264
Beginning balance at Dec. 31, 2018 11,531 631,244 642,775
Net income 322 17,123 17,445
Cash distributions (666) (35,402) (36,068)
Ending balance at Jun. 30, 2019 11,187 612,965 624,152
Convertible preferred units, beginning balance at Dec. 31, 2018     89,264
Net income     3,600
Cash distributions     (3,600)
Convertible preferred units, ending balance at Jun. 30, 2019     89,264
Beginning balance at Mar. 31, 2019 11,402 624,408 635,810
Net income 118 6,258 6,376
Cash distributions (333) (17,701) (18,034)
Ending balance at Jun. 30, 2019 $ 11,187 $ 612,965 624,152
Convertible preferred units, beginning balance at Mar. 31, 2019     89,264
Net income     1,800
Cash distributions     (1,800)
Convertible preferred units, ending balance at Jun. 30, 2019     $ 89,264
v3.19.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
OPERATING ACTIVITIES          
Net income $ 8,176 $ 21,681 $ 21,045 $ 52,405  
Adjustments to reconcile net income to cash provided by operating activities:          
Depreciation 22,429 22,332 44,860 43,906 $ 88,756
Amortization of contract intangibles / liabilities     (456) (456)  
Amortization of deferred revenue       (743)  
Amortization of deferred debt issuance cost 657 696 1,314 1,271  
Drydocking expenditure     69 (3,803)  
Income tax expense 3 3 6 6  
Income taxes paid     (121) (172)  
Unrealized (gain) loss on derivative instruments     17,047 (11,253)  
Unrealized (gain) loss on foreign currency transactions     30 (44)  
Changes in operating assets and liabilities          
Decrease (increase) in amounts due from related parties     (363) (290)  
Decrease (increase) in inventories     4 4  
Decrease (increase) in other current assets     (71) 3,516  
Decrease (increase) in accrued revenue     (567) (884)  
Increase (decrease) in trade accounts payable     (1,843) (1,222)  
Increase (decrease) in accrued expenses     (173) (656)  
Increase (decrease) prepaid charter     1,121 449  
Increase (decrease) in amounts due to related parties     119 (3,800)  
Net cash provided by operating activities     82,021 78,234  
INVESTING ACTIVITIES          
Net cash provided by (used in) investing activities       (15,386)  
FINANCING ACTIVITIES          
Proceeds from long-term debt       145,500  
Repayment of long-term debt     (41,661) (146,002)  
Repayment of long-term debt from related parties       (22,535)  
Payment of debt issuance cost     21 (1,114)  
Cash distributions     (39,668) (39,668)  
Net proceeds from issuance of common units       (4)  
Net cash (used in) financing activities     (81,308) (63,823)  
Effect of exchange rate changes on cash     4 (45)  
Net increase (decrease) in cash and cash equivalents     717 (1,019)  
Cash and cash equivalents at the beginning of the period     41,712 46,104 46,104
Cash and cash equivalents at the end of the period $ 42,429 $ 45,085 $ 42,429 45,085 $ 41,712
Property, Plant and Equipment, Excluding Acquired Vessels          
INVESTING ACTIVITIES          
Disposals (additions) to vessel and equipment       (10)  
Anna Knutsen          
INVESTING ACTIVITIES          
Disposals (additions) to vessel and equipment       $ (15,376)  
v3.19.2
Description of Business
6 Months Ended
Jun. 30, 2019
Description of Business  
Description of Business

1) Description of Business

KNOT Offshore Partners LP (the “Partnership”) was formed as a limited partnership under the laws of the Republic of the Marshall Islands. The Partnership was formed for the purpose of acquiring 100% ownership interests in four shuttle tankers owned by Knutsen NYK Offshore Tankers AS (“KNOT”) in connection with the Partnership’s initial public offering of its common units (the “IPO”), which was completed on April 15, 2013.

Pursuant to the Partnership’s Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), KNOT Offshore Partners GP LLC, a wholly owned subsidiary of KNOT, and the general partner of the Partnership (the “General Partner”), has irrevocably delegated to the Partnership’s board of directors the power to oversee and direct the operations of, manage and determine the strategies and policies of the Partnership. During the period from the Partnership’s IPO until the time of the Partnership’s first annual general meeting (“AGM”) on June 25, 2013, the General Partner retained the sole power to appoint, remove and replace all members of the Partnership’s board of directors. From the first AGM, four of the seven board members became electable by the common unitholders and accordingly, from this date, KNOT, as the owner of the General Partner, no longer retained the power to control the Partnership’s board of directors and, hence, the Partnership. As a result, the Partnership is no longer considered to be under common control with KNOT and as a consequence, the Partnership accounts for acquisitions of businesses and assets under the purchase method of accounting and not as transfers of equity interests between entities under common control. All acquisitions have been consolidated into the Partnership’s results as of the date of acquisition. Please read Note 2—Summary of Significant Accounting Policies and Note 16—Acquisitions.

As of June 30, 2019, the Partnership had a fleet of sixteen shuttle tankers, the Windsor Knutsen , the Bodil Knutsen , the Recife   Knutsen , the Fortaleza Knutsen , the Carmen Knutsen, the Hilda Knutsen, the Torill Knutsen , the Dan Cisne , the Dan Sabia, the Ingrid   Knutsen , the Raquel Knutsen, the Tordis Knutsen, the Vigdis Knutsen, the Lena Knutsen, the Brasil Knutsen and the Anna Knutsen, each referred to as a “Vessel” and, collectively, as the “Vessels”. The Vessels operate under fixed long-term charter contracts to charterers, with expiration dates between 2019 and 2025. Please see Note 4—Operating Leases.

The consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern.

The Partnership expects that its primary future sources of funds will be available cash, cash from operations, borrowings under any new loan agreements and the proceeds of any equity financings. The Partnership believes that these sources of funds (assuming the current rates earned from existing charters) will be sufficient to cover operational cash outflows and ongoing obligations under the Partnership’s financing commitments to pay loan interest and make scheduled loan repayments and to make distributions on its outstanding units. Accordingly, as of August 28, 2019, the Partnership believes that its current resources, including the undrawn portion of its revolving credit facilities of $28.7 million, are sufficient to meet working capital requirements for its current business for at least the next twelve months.

v3.19.2
Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2019
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

2) Summary of Significant Accounting Policies

(a) Basis of Preparation

The accompanying unaudited condensed consolidated interim financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of management of the Partnership, all adjustments considered necessary for a fair presentation, which are of normal recurring nature, have been included. All intercompany balances and transactions are eliminated. The unaudited condensed consolidated financial statements do not include all the disclosures and information required for a complete set of annual financial statements; and, therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2018, which are included in the Partnership’s Annual Report on Form 20-F (the “2018 20-F”).

(b) Significant Accounting Policies

Except as described below under (c)  Recent Accounting Pronouncements - Adoption of new accounting standards ”, the accounting policies adopted in the preparation of the unaudited condensed consolidated interim financial statements are consistent with those followed in the preparation of the Partnership’s audited consolidated financial statements for the year ended December 31, 2018, as contained in the Partnership’s 2018 20-F.

(c) Recent Accounting Pronouncements

Adoption of new accounting standards

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, Leases (ASC 842), that amends the accounting guidance on leases for both lessors and lessees. On January 1, 2019, the Partnership adopted the new standard using the optional transition method to apply the new standard at the transition date of January 1, 2019 with no retrospective adjustments to prior periods. Consequently, the accounting and disclosures for the prior periods continue to be presented in accordance with the previous standard for leases.

The Partnership elected the package of practical expedients and has not reassessed whether any expired or existing contracts are, or contain leases, not reassessed lease classifications, and not reassessed initial direct costs for any existing leases. Additionally, the practical expedient of disregarding short-term leases for agreements with lease terms of 12 months or less as a lessee was adopted as an accounting policy for all underlying assets.

The Partnership’s time charter contracts include both a lease component, consisting of the lease of the vessel, and non-lease component, consisting of operation of the vessel for the customers. The Partnership has elected to use the practical expedient to not separate the non-lease component from the lease component for all such charters where the lease component is classified as an operating lease, and account for the combined components as an operating lease. Consequently, there were no changes to the timing or amount of revenue recognized, and therefore, no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessor accounting. Additional qualitative and quantitative disclosures are required and have been implemented for reporting periods beginning as of January 1, 2019, while prior periods are not adjusted and continue to be reported under the previous accounting standards. See Note 4—Operating Leases. The Partnership does not have any material leased assets. 

Adoption of the new standard resulted in recording a right-of-use asset and a lease liability on the consolidated balance sheet for operating leases of $2.3 million and $2.3 million, respectively, as of January 1, 2019. There was no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessee accounting. As of June 30, 2019, the right-of-use asset and lease liability for operating leases was $2.1 million and $2.1 million, respectively, and are presented in separate lines on the balance sheets. See Note 4—Operating Leases.

Accounting pronouncements to be adopted

Recently issued accounting pronouncements are not expected to materially impact the Partnership.

v3.19.2
Segment Information
6 Months Ended
Jun. 30, 2019
Segment Information  
Segment Information

3) Segment Information

The Partnership has not presented segment information as it considers its operations to occur in one reportable segment, the shuttle tanker market. As of June 30, 2018 and 2019, the Partnership’s fleet consisted of sixteen vessels and operated under twelve time charters and four bareboat charters. Under the time charters and bareboat charters, the charterer, not the Partnership, controls the choice of which trading areas the applicable Vessel will serve. Accordingly, the Partnership’s management, including the chief operating decision makers, does not evaluate performance according to geographical region.

 

The following table presents consolidated revenues and percentages of revenues for customers that accounted for more than 10% of the Partnership’s consolidated revenues during the three and six months ended June 30, 2019 and 2018. All of these customers are subsidiaries of major international oil companies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  June 30,

 

Six Months Ended June 30,

(U.S. Dollars in thousands)

    

2019

 

    

2018

 

    

2019

 

    

2018

 

Eni Trading and Shipping S.p.A.

 

$

11,134

 

16

%  

 

$

11,555

 

17

%  

 

$

22,146

 

16

%  

 

$

22,936

 

17

%

Fronape International Company, a subsidiary of Petrobras Transporte S.A.

 

 

11,249

 

16

%  

 

 

11,248

 

16

%  

 

 

22,378

 

16

%  

 

 

22,378

 

16

%

Repsol Sinopec Brasil, S.A., a subsidiary of Repsol Sinopec Brasil, B.V.

 

 

9,282

 

13

%  

 

 

9,283

 

13

%  

 

 

18,463

 

13

%  

 

 

18,222

 

13

%

Brazil Shipping I Limited, a subsidiary of Royal Dutch Shell

 

 

20,606

 

29

%  

 

 

20,399

 

29

%  

 

 

40,889

 

29

%  

 

 

40,572

 

30

%

Galp Sinopec Brasil Services B.V.

 

 

8,881

 

13

%  

 

 

6,438

 

 9

%  

 

 

17,584

 

12

%  

 

 

12,071

 

 9

%

 

v3.19.2
Operating Leases
6 Months Ended
Jun. 30, 2019
Operating Leases  
Operating Leases

4) Operating Leases

Revenues

The Partnership’s primary source of revenues is chartering its shuttle tankers to its customers. The Partnership uses two types of contracts, time charter contracts and bareboat charter contracts. The Partnership’s time-charter contracts include both a lease component, consisting of the lease of the vessel, and non-lease component, consisting of operation of the vessel for the customers. The Partnership has elected to not separate the non-lease component from the lease component for all such charters, where the lease component is classified as an operating lease, and to account for the combined components as an operating lease.

The following table presents the Partnership’s revenues by lease and non-lease contracts for the three and six months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  June 30,

 

Six Months Ended  June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Lease revenue from lease payment of operating leases

 

$

70,908

 

$

69,221

 

$

141,456

 

$

136,608

Non-lease revenues (loss of hire insurance recoveries and other income)

 

 

14

 

 

544

 

 

15

 

 

1,200

Total revenues

 

$

70,922

 

$

69,765

 

$

141,471

 

$

137,808

 

As a result of the revised guidance on leasing, the lessor accounting did not change. See Note 2(c)—Recent Accounting Pronouncements.

As of June 30, 2019, the minimum contractual future revenues to be received from time charters and bareboat charters during the next five years and thereafter are as follows:

 

 

 

 

(U.S. Dollars in thousands)

    

 

 

2019 (excluding the six months ended June 30, 2019)

 

$

136,536

2020

 

 

240,710

2021

 

 

219,841

2022

 

 

152,078

2023

 

 

63,918

2024 and therafter

 

 

28,674

Total

 

$

841,757

 

The minimum contractual future revenues should not be construed to reflect total charter hire revenues for any of the years. Minimum contractual future revenues are calculated based on certain assumptions such as operating days per year. In addition, minimum contractual future revenues presented in the table above have not been reduced by estimated off-hire time for periodic maintenance. The amounts may vary given unscheduled future events such as vessel maintenance.

The Partnership’s fleet as of June 30, 2019 consisted of:

·

the Fortaleza Knutsen, a shuttle tanker built in 2011 that is currently operating under a bareboat charter that expires in March 2023 with Fronape International Company, a subsidiary of Petrobras Transporte S.A. (“Transpetro”);

·

the Recife Knutsen, a shuttle tanker built in 2011 that is currently operating under a bareboat charter that expires in August 2023 with Transpetro;

·

the Bodil Knutsen, a shuttle tanker built in 2011 that is currently operating under a time charter that expires in May 2020 with Statoil ASA (now Equinor), with options to extend until May 2024;

·

the Windsor Knutsen, a conventional oil tanker built in 2007 and retrofitted to a shuttle tanker in 2011. The vessel operated under a time charter with Brazil Shipping I Limited, a subsidiary of Shell, until July 2014. From July 2014 until October 2015, the vessel was employed under a time charter with KNOT. Beginning in October 2015, the vessel commenced operations under a two year time charter with Brazil Shipping I Limited, with options to extend until 2023.  In March 2019, the time charter contract was suspended for ten to twelve months. During the suspension period, the Windsor Knutsen is operating under a time charter contract with Knutsen Shuttle Tankers Pool AS on the same terms as the existing contract with Shell. As a result of the suspension period, Shell has options to extend the time charter until October 2024. On July 16, 2019, a subsidiary of Shell exercised its option to extend the time charter of the Windsor Knutsen by one additional year until October 2020;

·

the Carmen Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in January 2023, with Repsol Sinopec Brasil, B.V. a subsidiary of Repsol Sinopec Brasil, S.A. (“Repsol”), with options to extend until January 2026;

·

the Hilda Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in August 2022 with Eni Trading and Shipping S.p.A. (“ENI”), with options to extend until August 2025;

·

the Torill Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in November 2019 with ENI, with options to extend until November 2023;

·

the Dan Cisne, a shuttle tanker built in 2011 that is currently operating under a bareboat charter that expires in September 2023 with Transpetro;

·

the Dan Sabia, a shuttle tanker built in 2012 that is currently operating under a bareboat charter that expires in January 2024 with Transpetro;

·

the Ingrid Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in February 2024 with Standard Marine Tønsberg AS, a Norwegian subsidiary of ExxonMobil (“ExxonMobil”), with options to extend until February 2029;

·

the Raquel Knutsen, a shuttle tanker built in 2015 that is currently operating under a time charter that expires in June 2025 with Repsol, with options to extend until June 2030;

·

the Tordis Knutsen, a shuttle tanker built in 2016 that is currently operating under a time charter that expires in January 2022 with a subsidiary of Shell, with options to extend until January 2032;

·

the Vigdis Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in the second quarter of 2022 with a subsidiary of Shell, with options to extend until the second quarter of 2032;

·

the Lena Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in the third quarter of 2022 with a subsidiary of Shell, with options to extend until the third quarter of 2032;  

·

the Brasil Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in the third quarter of 2022 with Galp Sinopec Brazil Services B.V. (“Galp”), with options to extend until the third quarter of 2028; and

·

the Anna Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in the second quarter of 2022 with Galp, with options to extend until the second quarter of 2028. 

 

Lease obligations

 

The Partnership does not have any material leased assets but has some leased equipment on operational leases on the various ships operating on time charter contracts. Consequently, adoption of the new standard resulted in recording a right-of-use asset and a lease liability on the consolidated balance sheet for operating leases of $2.3 million as of January 1, 2019. There was no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessee accounting. As of June 30, 2019, the right-of-use asset and lease liability for operating leases was $2.1 million and are presented as separate line items on the balance sheets. The operating lease cost and corresponding cash flow effect for the three and six months ended June 30, 2019 was $0.2 million and $0.3 million respectively. As of June 30, 2019, the weighted average discount rate for the operating leases was 4.8% and was determined using the expected incremental borrowing rate for a loan facility of similar term. As of June 30, 2019, the weighted average remaining lease terms are 3.5 years.

 

A maturity analysis of the Partnership’s lease liabilities from leased-in equipment as of June 30, 2019 is as follows:

 

 

 

 

 

(U.S. Dollars in thousands)

    

    

 

2019 (excluding the six months ended June 30, 2019)

 

$

322

2020

 

 

644

2021

 

 

644

2022

 

 

644

Total

 

$

2,254

Less imputed interest

 

 

180

Carrying value of operating lease liabilities

 

$

2,074

 

v3.19.2
Insurance Proceeds
6 Months Ended
Jun. 30, 2019
Insurance Proceeds  
Insurance Proceeds

5) Insurance Proceeds

During the fourth quarter of 2017, the Carmen Knutsen undertook her 5‑year special drydocking survey. During dismantling for overhaul, a technical default with her controllable pitch propeller was found. As a result, the Vessel went to a different yard to complete the repair. Repairs were completed and the Vessel was back on hire on January 1, 2018. The additional off-hire and technical costs were subject to an insurance claim. Under its loss of hire insurance policies, the Partnership’s insurer paid the hire rate agreed in respect of the Carmen Knutsen for each day in excess of 14 deductible days while the Vessel was off-hire as a result of the repairs of the controllable pitch propeller. For the three and six months ended June 30, 2018, the Partnership recorded $0.45 million for loss of hire which were recorded as a component of total revenues since day rates are recovered under the terms of the policy.

For the year ended December 31, 2017, the Partnership recorded $2.40 million to  vessel operating expense as an estimate of the cost of repairs of the controllable pitch propeller. For the six months ended June 30, 2018, an additional repair cost of $0.15 million was recorded to vessel operating expenses. As of June 30, 2018, the Partnership had received payments and recorded $2.25 million for hull and machinery repairs, resulting in a net expense of $0.30 million.

v3.19.2
Other Finance Expenses
6 Months Ended
Jun. 30, 2019
Other Finance Expenses  
Other Finance Expenses

6) Other Finance Expenses

(a) Interest Expense

The following table presents a reconciliation of total interest cost and interest expense as reported in the consolidated statements of operations for the three and six months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Interest expense

 

$

12,529

 

$

11,830

 

$

25,530

 

$

21,848

Amortization of debt issuance cost and fair value of debt assumed

 

 

657

 

 

696

 

 

1,314

 

 

1,271

Total interest cost

 

$

13,186

 

$

12,526

 

$

26,844

 

$

23,119

 

(b) Other Finance Expense

The following table presents the other finance expense for three and six months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Bank fees, charges

 

$

224

 

$

151

 

$

281

 

$

241

Guarantee costs

 

 

 —

 

 

140

 

 

 —

 

 

282

Commitment fees

 

 

62

 

 

(3)

 

 

123

 

 

103

Total other finance expense

 

$

286

 

$

288

 

$

404

 

$

626

 

v3.19.2
Derivative Instruments
6 Months Ended
Jun. 30, 2019
Derivative Instruments  
Derivative Instruments

7) Derivative Instruments

The unaudited condensed consolidated interim financial statements include the results of interest rate swap contracts to manage the Partnership’s exposure related to changes in interest rates on its variable rate debt instruments and the results of foreign exchange forward contracts to manage its exposure related to changes in currency exchange rates on its operating expenses, mainly crew expenses, in currency other than U.S. Dollars and on its contract obligations. The Partnership does not apply hedge accounting for derivative instruments. The Partnership does not speculate using derivative instruments.

By using derivative financial instruments to economically hedge exposures to changes in interest rates, the Partnership exposes itself to credit risk and market risk. Derivative instruments that economically hedge exposures are used for risk management purposes, but these instruments are not designated as hedges for accounting purposes. Credit risk is the failure of the counterparty to perform under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty owes the Partnership, which creates credit risk for the Partnership. When the fair value of a derivative instrument is negative, the Partnership owes the counterparty, and, therefore, the Partnership is not exposed to the counterparty’s credit risk in those circumstances. The Partnership minimizes counterparty credit risk in derivative instruments by entering into transactions with major banking and financial institutions. The derivative instruments entered into by the Partnership do not contain credit risk-related contingent features. The Partnership has not entered into master netting agreements with the counterparties to its derivative financial instrument contracts.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates or commodity prices. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Partnership assesses interest rate risk by monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating economical hedging opportunities.

The Partnership has historically used variable interest rate mortgage debt to finance its vessels. The variable interest rate mortgage debt obligations expose the Partnership to variability in interest payments due to changes in interest rates. The Partnership believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Partnership has entered into London Interbank Offered Rate (“LIBOR”)-based interest rate swap contracts to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable rate cash flow exposure on the mortgage debt obligations to fixed cash flows. Under the terms of the interest rate swap contracts, the Partnership receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed rate debt for the notional amount of its debt hedged.

As of June 30, 2019, the Partnership had entered into various interest swap agreements for a total notional amount of $571.5 million to hedge against the interest rate risks of its variable rate borrowings. Under the terms of the interest rate swap agreements, the Partnership receives interest based on three or six month LIBOR and pays a weighted average interest rate of 1.88%.

As of June 30, 2019 and December 31, 2018, the total notional amount of the Partnership’s outstanding interest rate swap contracts that were entered into in order to hedge outstanding or forecasted debt obligations were $571.5 million and $555.5 million, respectively. As of June 30, 2019 and December 31, 2018, the carrying amount of the interest rate swaps contracts was a net liability of $2.7 million and a net asset of $15.9 million, respectively. See Note 8—Fair Value Measurements.

Changes in the fair value of interest rate swap contracts are reported in realized and unrealized gain (loss) on derivative instruments in the same period in which the related interest affects earnings.

The Partnership and its subsidiaries utilize the U.S. Dollar as their functional and reporting currency, because all of their revenues and the majority of their expenditures, including the majority of their investments in vessels and their financing transactions, are denominated in U.S. Dollars. Payment obligations in currencies other than the U.S. Dollar, and in particular operating expenses in Norwegian Kroner (“NOK”), expose the Partnership to variability in currency exchange rates. The Partnership believes that it is prudent to limit the variability of a portion of its currency exchange exposure. To meet this objective, the Partnership entered into foreign exchange forward contracts to manage fluctuations in cash flows resulting from changes in the exchange rates towards the U.S. Dollar. The agreements change the variable exchange rate to fixed exchange rates at agreed dates.

As of June 30, 2019 and December 31, 2018, the total contract amount in foreign currency of the Partnership’s outstanding foreign exchange forward contracts that were entered into to economically hedge outstanding future payments in currencies other than the U.S. Dollar were NOK 169.0 million and NOK 244.2 million, respectively. As of June 30, 2019 and December 31, 2018, the carrying amount of the Partnership’s foreign exchange forward contracts was a net liability of $0.2 million and $1.7 million, respectively. See Note 8—Fair Value Measurements.

The following table presents the realized and unrealized gains and losses that are recognized in earnings as net gain (loss) on derivative instruments for the three and six months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Realized gain (loss):

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swap contracts

 

$

1,168

 

$

57

 

$

2,246

 

$

(247)

Foreign exchange forward contracts

 

 

(658)

 

 

134

 

 

(1,446)

 

 

1,239

Total realized gain (loss):

 

 

510

 

 

191

 

 

800

 

 

992

Unrealized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

(11,521)

 

 

2,995

 

 

(18,619)

 

 

11,942

Foreign exchange forward contracts

 

 

693

 

 

(1,218)

 

 

1,572

 

 

(990)

Total unrealized gain (loss):

 

 

(10,828)

 

 

1,777

 

 

(17,047)

 

 

10,952

Total realized and unrealized gain (loss) on derivative instruments:

 

$

(10,318)

 

$

1,968

 

$

(16,247)

 

$

11,944

 

v3.19.2
Fair Value Measurements
6 Months Ended
Jun. 30, 2019
Fair Value Measurements  
Fair Value Measurements

8) Fair Value Measurements

(a) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Partnership’s financial instruments as of June 30, 2019 and December 31, 2018. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

    

Carrying 

    

Fair 

    

Carrying 

    

Fair 

(U.S. Dollars in thousands)

 

Amount  

 

Value  

 

Amount  

 

Value  

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,429

 

$

42,429

 

$

41,712

 

$

41,712

Current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

1,856

 

 

1,856

 

 

4,621

 

 

4,621

Foreign exchange forward contracts

 

 

125

 

 

125

 

 

                  —

 

 

                  —

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

914

 

 

914

 

 

11,667

 

 

11,667

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

132

 

 

132

 

 

                  —

 

 

                  —

Foreign exchange forward contracts

 

 

294

 

 

294

 

 

1,740

 

 

1,740

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

5,314

 

 

5,314

 

 

345

 

 

345

Long-term debt, current and non-current

 

 

1,045,686

 

 

1,045,686

 

 

1,087,347

 

 

1,087,347

 

The carrying amounts shown in the table above are included in the consolidated balance sheets under the indicated captions. Carrying amount of long-term debt, current and non-current, above excludes capitalized debt issuance cost of $8.7 million and $10.1 million as of June 30, 2019 and December 31, 2018 , respectively. The carrying value of trade accounts receivable, trade accounts payable and receivables/payables to owners and affiliates approximate their fair value.

The fair values of the financial instruments shown in the above table as of June 30, 2019 and December 31, 2018 represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Partnership’s own judgment about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Partnership based on the best information available in the circumstances, including expected cash flows, appropriately risk-adjusted discount rates and available observable and unobservable inputs.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

·

Cash and cash equivalents and restricted cash: The fair value of the Partnership’s cash balances approximates the carrying amounts due to the current nature of the amounts. As of June 30, 2019 and December 31, 2018 there is no restricted cash.

·

Foreign exchange forward contracts: The fair value is calculated using mid-rates (excluding margins) as determined by counterparties based on available market rates as of the balance sheet date. The fair value is discounted from the value at expiration to the current value of the contracts.

·

Interest rate swap contracts: The fair value of interest rate swap contracts is determined using an income approach using the following significant inputs: (1) the term of the swap contract (weighted average of 4.4 years and 4.9 years, as of June 30, 2019 and December 31, 2018 , respectively), (2) the notional amount of the swap contract (ranging from $9.3 million to $50.0 million for the contracts as of June 30,2019 and ranging from $10.0 million to $50.0 million for the contracts as of December 31, 2018), discount rates interpolated based on relevant LIBOR swap curves; and (3) the rate on the fixed leg of the swap contract (rates ranging from 1.38% to 2.90% as of June 30, 2019 and as of December 31, 2018).

·

Long-term debt: With respect to long-term debt measurements, the Partnership uses market interest rates and adjusts for risks, such as its own credit risk. In determining an appropriate spread to reflect its credit standing, the Partnership considered interest rates currently offered to KNOT for similar debt instruments of comparable maturities by KNOT’s and the Partnership’s bankers as well as other banks that regularly compete to provide financing to the Partnership.

(b) Fair Value Hierarchy

The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value or for which fair value is required to be disclosed) as of June 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

at Reporting Date Using

 

 

 

 

 

Quoted Price

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Carrying

 

Markets for

 

Other

 

Significant

 

 

Value

 

Identical

 

Observable

 

Unobservable

 

 

June 30, 

 

Assets

 

Inputs

 

Inputs

(U.S. Dollars in thousands)

    

2019

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial assets:

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

42,429

 

$

42,429

 

$

 —

 

$

 —

Current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

1,856

 

 

 —

 

 

1,856

 

 

 —

Foreign exchange forward contracts

 

 

125

 

 

 —

 

 

125

 

 

 —

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

914

 

 

 —

 

 

914

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

132

 

 

 —

 

 

132

 

 

 —

Foreign exchange forward contracts

 

 

294

 

 

 —

 

 

294

 

 

 —

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

5,314

 

 

 —

 

 

5,314

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Long-term debt, current and non-current

 

 

1,045,686

 

 

 —

 

 

1,045,686

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

at Reporting Date Using

 

 

 

 

 

Quoted Price

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Carrying

 

Markets for

 

Other

 

Significant

 

 

Value

 

Identical

 

Observable

 

Unobservable

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

(U.S. Dollars in thousands)

    

2018

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,712

 

$

41,712

 

$

 

$

 —

Current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

4,621

 

 

 

 

4,621

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 

 

 —

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

11,667

 

 

 

 

11,667

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 

 

 —

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

 —

 

 

 

 

 

 

 —

Foreign exchange forward contracts

 

 

1,740

 

 

 

 

1,740

 

 

 —

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

345

 

 

 

 

345

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 

 

 —

Long-term debt, current and non-current

 

 

1,087,347

 

 

 

 

1,087,347

 

 

 —

 

The Partnership’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1,  Level 2 or Level 3 as of June 30, 2019 and December 31, 2018.

v3.19.2
Income Taxes
6 Months Ended
Jun. 30, 2019
Income Taxes  
Income Taxes

9) Income Taxes

Components of Current and Deferred Tax Expense

After the reorganization of the Partnership’s predecessor’s activities into the new group structure in February 2013, all profit from continuing operations in Norway is taxable within the tonnage tax regime. The consequence of the reorganization was a one-time entrance tax into the tonnage tax regime due to the Partnership’s acquisition of the shares in the subsidiary that owns the Fortaleza Knutsen and the Recife Knutsen . Under the tonnage tax regime, the tax is based on the tonnage of the vessel and operating income is tax free. The net financial income and expense remains taxable as ordinary income tax for entities subject to the tonnage tax regime. Income taxes arising from the part of activities subject to ordinary taxation are included in income tax expense in the consolidated statements of operations.  For the portion of activities subject to the tonnage tax regime, tonnage taxes are classified as vessel operating expenses while the current and deferred taxes arising on net financial income and expense are reflected as income tax expense in the consolidated statements of operations.

The total amount of the entrance tax was estimated to be approximately $3.0 million, which was recognized in the three months ended March 31, 2013. The entrance tax is payable over several years and is calculated by multiplying the tax rate by the declining balance of the gain, which will decline by 20% each year. The amount payable will be affected by the change in tax rate which was reduced to 22% in 2019 from 23% in 2018. Approximately $0.1 million and $0.2 million of the entrance tax was paid during the first quarter of 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, UK income tax is presented as income taxes payable, while $0.5 million is presented as non-current deferred taxes payable.

Significant components of current and deferred income tax expense attributable to income from continuing operations for the three and six months ended June 30, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

 

2018

 

Income before income taxes

 

$

8,179

 

$

21,684

 

$

21,051

 

$

52,411

 

Income tax (expense)

 

 

(3)

 

 

(3)

 

 

(6)

 

 

(6)

 

Effective tax rate

 

$

0

%  

$

0

%  

$

0

%

$

0

%

 

The Partnership records a valuation allowance for deferred tax assets when it is more likely than not that some of or all of the benefit from the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, which relates to financial loss carry forwards and other deferred tax assets within the tonnage tax regime, the Partnership considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized taking into account all the positive and negative evidence available. As of June 30, 2019 and December 31, 2018 there are no deferred tax assets recognized.

v3.19.2
Vessels and Equipment
6 Months Ended
Jun. 30, 2019
Vessels and Equipment  
Vessels and Equipment

10) Vessels and Equipment

As of June 30, 2019 and December 2018, Vessels with a book value of $1,722 million and $1,767 million, respectively, are pledged as security held as a guarantee for the Partnership’s long-term debt. See Note 12—Long-term debt.

 

 

 

 

 

 

 

 

 

 

 

 

 

Vessels &

 

Accumulated

 

 

 

(U.S. Dollars in thousands)

 

equipment

 

depreciation

 

Net Vessels

Vessels, December 31, 2017

 

$

2,003,341

    

$

(280,318)

    

$

1,723,023

Additions

 

 

118,063

 

 

 —

 

 

118,063

Drydock costs

 

 

14,750

 

 

 —

 

 

14,750

Disposals

 

 

(5,731)

 

 

5,731

 

 

 —

Depreciation for the year

 

 

 —

 

 

(88,756)

 

 

(88,756)

Vessels, December 31, 2018

 

$

2,130,423

 

$

(363,343)

 

$

1,767,080

Additions

 

 

 —

 

 

 —

 

 

 —

Drydock costs

 

 

(69)

 

 

 —

 

 

(69)

Disposals

 

 

 —

 

 

 —

 

 

 —

Depreciation for the period

 

 

 —

 

 

(44,860)

 

 

(44,860)

Vessels, June 30, 2019

 

$

2,130,354

 

$

(408,203)

 

$

1,722,151

 

v3.19.2
Intangible Assets
6 Months Ended
Jun. 30, 2019
Intangible Assets  
Intangible Assets

11) Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

Above market

 

Above market

 

 

 

 

    

time charter

    

time charter

    

Total

(U.S. Dollars in thousands)

 

Tordis Knutsen

 

Vigdis Knutsen

 

intangibles

Intangibles, December 31, 2017

 

$

1,215

 

$

1,282

 

$

2,497

Additions

 

 

 —

 

 

 —

 

 

 —

Amortization for the year

 

 

(304)

 

 

(302)

 

 

(606)

Intangibles, December 31, 2018

 

$

911

 

$

980

 

$

1,891

Additions

 

 

 —

 

 

 —

 

 

 —

Amortization for the period

 

 

(151)

 

 

(151)

 

 

(302)

Intangibles, June 30, 2019

 

$

760

 

$

829

 

$

1,589

 

The intangible for the above-market value of the time charter contract associated with the Tordis Knutsen is amortized to time charter revenue on a straight line basis over the remaining term of the contract of approximately 4.8 years as of the acquisition date. The intangible for the above-market value of the time charter contract associated with the Vigdis Knutsen is amortized to time charter revenue on a straight line basis over the remaining term of the contract of approximately 4.9 years as of the acquisition date.

v3.19.2
Long-Term Debt
6 Months Ended
Jun. 30, 2019
Long-Term Debt.  
Long-Term Debt

12) Long-Term Debt

As of June 30, 2019 and December 31, 2018, the Partnership had the following debt amounts outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

(U.S. Dollars in thousands)

    

Vessel

    

2019

    

2018

$320 million loan facility

 

Windsor Knutsen, Bodil Knutsen, Carmen Knutsen, Fortaleza Knutsen, Recife Knutsen, Ingrid Knutsen

 

$

297,416

 

$

312,472

$55 million revolving credit facility

 

 

 

 

26,279

 

 

26,279

Hilda loan facility

 

Hilda Knutsen

 

 

87,692

 

 

90,769

Torill loan facility

 

Torill Knutsen

 

 

91,667

 

 

95,000

$172.5 million loan facility

 

Dan Cisne, Dan Sabia

 

 

76,839

 

 

81,839

Raquel loan facility

 

Raquel Knutsen

 

 

60,569

 

 

63,184

Tordis loan facility

 

Tordis Knutsen

 

 

83,461

 

 

85,991

Vigdis loan facility

 

Vigdis Knutsen

 

 

84,726

 

 

87,256

Lena loan facility

 

Lena Knutsen

 

 

83,300

 

 

85,750

Brasil loan facility

 

Brasil Knutsen

 

 

60,423

 

 

63,454

Anna loan facility

 

Anna Knutsen

 

 

68,314

 

 

70,353

$25 million revolving credit facility

 

  

 

 

25,000

 

 

25,000

Total long-term debt

 

  

 

 

1,045,686

 

 

1,087,347

Less: current installments

 

  

 

 

85,845

 

 

109,534

Less: unamortized deferred loan issuance costs

 

  

 

 

2,560

 

 

2,608

Current portion of long-term debt

 

  

 

 

83,285

 

 

106,926

Amounts due after one year

 

  

 

 

959,841

 

 

977,813

Less: unamortized deferred loan issuance costs

 

  

 

 

6,161

 

 

7,448

Long-term debt, less current installments, and unamortized deferred loan issuance costs

 

  

 

$

953,680

 

$

970,365

 

The Partnership’s outstanding debt of $1,045.7 million as of June 30, 2019 is repayable as follows:

 

 

 

 

 

 

 

 

(U.S. Dollars in thousands)

    

Period repayment

    

Balloon repayment

Remainder of 2019

 

$

42,873

 

$

 —

2020

 

 

85,945

 

 

 —

2021

 

 

86,545

 

 

95,811

2022

 

 

71,210

 

 

236,509

2023

 

 

55,535

 

 

202,185

2024 and thereafter

 

 

15,180

 

 

153,893

Total

 

$

357,288

 

$

688,398

 

As of June 30, 2019, the interest rates on the Partnership’s loan agreements were LIBOR plus a fixed margin ranging from 1.8% to 2.4%.

On June 28, 2019, the Partnership’s subsidiary, KNOT Shuttle Tankers AS, which owns the vessel-owning entities, extended the maturity of its unsecured revolving credit facility of $25 million with NTT Finance Corporation. The facility matures in August 2021, bears interest at LIBOR plus 1.8% and has a commitment fee of 0.5% on the undrawn portion of the facility. The commercial terms of the facility are unchanged from the facility entered into in June 2017 with NTT Finance Corporation.

v3.19.2
Related Party Transactions
6 Months Ended
Jun. 30, 2019
Related Party Transactions  
Related Party Transactions

13) Related Party Transactions

(a) Related Parties

Net expenses (income) from related parties included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

 

2018

Statements of operations:

 

 

  

 

 

  

 

 

  

 

 

  

Other income:

 

 

  

 

 

  

 

 

  

 

 

  

Guarantee income from KNOT (1) 

 

$

 —

 

$

94

 

$

 —

 

$

749

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Technical and operational management fee from KNOT to Vessels (2) 

 

 

1,736

 

 

1,509

 

 

3,479

 

 

3,019

General and administrative expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Administration fee from KNOT Management (3)

 

 

314

 

 

449

 

 

648

 

 

812

Administration fee from KOAS (3)

 

 

174

 

 

148

 

 

345

 

 

290

Administration fee from KOAS UK (3)

 

 

30

 

 

30

 

 

60

 

 

60

Administration and management fee from KNOT (4)

 

 

42

 

 

41

 

 

85

 

 

80

Total

 

$

2,296

 

$

2,083

 

$

4,617

 

$

3,512

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

(U.S. Dollars in thousands)

    

  2019

    

2018

Balance Sheet:

 

 

  

 

 

  

Vessels:

 

 

  

 

 

  

Drydocking supervision fee from KNOT (5)

 

$

 —

 

$

187

Drydocking supervision fee from KOAS (5)

 

 

 —

 

 

24

Total

 

$

 —

 

$

211


(1)

Guarantee income from KNOT:  Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charter of the Bodil Knutsen and Windsor Knutsen for a period of five years from the closing date of the IPO (until April 15, 2018). In October 2015, the Windsor Knutsen commenced on a new Shell time charter with a hire rate below the hire rate in the initial charter. The difference between the new hire rate and the initial rate was paid by KNOT until April 15, 2018. See Note 13(b)—Related Party Transactions—Guarantees and Indemnifications.

(2)

Technical and operational management fee from KNOT Management or KNOT Management Denmark to Vessels: KNOT Management or KNOT Management Denmark provides technical and operational management of the vessels on time charter including crewing, purchasing, maintenance and other operational service. In addition, there is also a charge for 24‑hour emergency response services provided by KNOT Management for all vessels managed by KNOT Management.

(3)

Administration fee from KNOT Management, Knutsen OAS Shipping AS (“KOAS”) and Knutsen OAS (UK) Ltd. (“KOAS UK”) : Administration costs include the compensation and benefits of KNOT Management’s management and administrative staff as well as other general and administration expenses. Some benefits are also provided by KOAS and KOAS UK. Net administration costs are total administration cost plus a 5% margin, reduced for the total fees for services delivered by the administration staffs and the estimated shareholder costs for KNOT that have not been allocated. As such, the level of net administration costs as a basis for the allocation can vary from year to year based on the administration and financing services offered by KNOT to all the vessels in its fleet each year. KNOT Management also charges each subsidiary a fixed annual fee for the preparation of the statutory financial statement.

(4)

Administration and management fee from KNOT Management and KNOT Management Denmark: For bareboat charters, the shipowner is not responsible for providing crewing or other operational services and the customer is responsible for all vessel operating expenses and voyage expenses. However, each of the vessels under bareboat charters is subject to a management and administration agreement with either KNOT Management or KNOT Management Denmark, pursuant to which these companies provide general monitoring services for the vessels in exchange for an annual fee.

(5)

Drydocking supervision fee from KNOT and KOAS : KNOT and KOAS provide supervision and hire out service personnel during drydocking of the vessels. The fee is calculated as a daily fixed fee.

(b) Guarantees and Indemnifications

Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charters of each of the Windsor Knutsen and the Bodil Knutsen for a period of five years from the closing date of the IPO (until April 15, 2018).

In April 2014, the Partnership was notified that Shell would not exercise its option to extend the Windsor Knutsen time charter after the expiration of its initial term. The vessel was re-delivered on July 28, 2014. In order to comply with its obligations under the Omnibus Agreement, on July 29, 2014, KNOT and the Partnership entered into a time charter for the vessel at a rate of hire that would have been in effect during the option period under the previous Shell time charter. This charter was effective until the new Shell time charter commenced in October 2015. The new Shell charter has a hire rate that is lower than the hire rate in the initial charter. The difference between the new hire rate and the initial rate was paid by KNOT until April 15, 2018.

Under the Omnibus Agreement, KNOT agreed to indemnify the Partnership until April 15, 2018 (or for a period of at least three years after the purchase of the Hilda Knutsen , the Torill Knutsen , the Ingrid Knutsen and the Raquel Knutsen , as applicable), against certain environmental and toxic tort liabilities with respect to certain assets that KNOT contributed or sold to the Partnership to the extent arising prior to the time they were contributed or sold. However, claims are subject to a deductible of $0.5 million and an aggregate cap of $5 million.

(c) Transactions with Management and Directors

See the footnotes to Note 13(a)—Related Party Transactions for a discussion of the allocation principles for KNOT’s administrative costs, including management and administrative staff, included in the consolidated statements of operations.

(d) Amounts Due from (to) Related Parties

Balances with related parties consisted of the following:

 

 

 

 

 

 

 

 

 

 

At June 30, 

 

At December 31, 

(U.S. Dollars in thousands)

    

2019

    

2018

Balance Sheet:

 

 

  

 

 

  

Trading balances due from KOAS

 

$

578

 

$

466

Trading balances due from KNOT and affiliates

 

 

926

 

 

675

Amount due from related parties

 

$

1,504

 

$

1,141

Trading balances due to KOAS

 

$

688

 

$

629

Trading balances due to KNOT and affiliates

 

 

501

 

 

441

Amount due to related parties

 

$

1,189

 

$

1,070

 

Amounts due from (to) related parties are unsecured and intended to be settled in the ordinary course of business. The majority of these related party transactions relate to vessel management and other fees due to KNOT, KNOT Management, KOAS UK and KOAS.

(e) Trade accounts payable

Trade accounts payable to related parties are included in total trade accounts payable in the balance sheet. The balances to related parties consisted of the following:

 

 

 

 

 

 

 

 

 

 

At June 30, 

 

At December 31, 

(U.S. Dollars in thousands)

    

2019

    

2018

Balance Sheet:

 

 

  

 

 

  

Trading balances due to KOAS

 

$

552

 

$

381

Trading balances due to KNOT and affiliates

 

 

382

 

 

411

Trade accounts payable to related parties

 

$

934

 

$

792

 

(f) Acquisitions from KNOT

On March 1, 2018, the Partnership acquired KNOT’s 100% interest in KNOT Shuttle Tankers 30 AS (“KNOT 30”), the company that owns and operates the Anna Knutsen. This acquisition was accounted for as an acquisition of assets.

The board of directors of the Partnership (the “Board”) and the conflicts committee of the Board (the “Conflicts Committee”) approved the purchase price for the transaction described above. The Conflicts Committee retained a financial advisor to assist with its evaluation of the transaction. See Note 16—Acquisitions.

v3.19.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2019
Commitments and Contingencies  
Commitments and Contingencies

14) Commitments and Contingencies

Assets Pledged

As of June 30, 2019 and December 31, 2018, Vessels with a book value of $1,722 million and $1,767 million, respectively, were pledged as security held as guarantee for the Partnership’s long-term debt and interest rate swap obligations. See Note 7—Derivative Instruments and Note 12—Long-Term Debt.

Claims and Legal Proceedings

From time to time, the Partnership is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows.

Insurance

The Partnership maintains insurance on all the Vessels to insure against marine and war risks, which include damage to or total loss of the Vessels, subject to deductible amounts that average $0.15 million per Vessel, and loss of hire.

Under the loss of hire policies, the insurer will pay a compensation for the lost hire rate agreed in respect of each Vessel for each day, in excess of 14 deductible days, for the time that the Vessel is out of service as a result of damage, for a maximum of 180 days. In addition, the Partnership maintains protection and indemnity insurance, which covers third-party legal liabilities arising in connection with the Vessels’ activities, including, among other things, the injury or death of third-party persons, loss or damage to cargo, claims arising from collisions with other vessels and other damage to other third-party property, including pollution arising from oil or other substances. This insurance is unlimited, except for pollution, which is limited to $1 billion per vessel per incident. The protection and indemnity insurance is maintained through a protection and indemnity association, and as a member of the association, the Partnership may be required to pay amounts above budgeted premiums if the member claims exceed association reserves, subject to certain reinsured amounts. If the Partnership experiences multiple claims each with individual deductibles, losses due to risks that are not insured or claims for insured risks that are not paid, it could have a material adverse effect on the Partnership’s results of operations and financial condition.

Carmen Knutsen

During the fourth quarter of 2017, the Carmen Knutsen undertook her 5‑year special drydocking survey. During dismantling for overhaul, a technical default with her controllable pitch propeller was found. As a result, the Vessel went to a different yard to complete the repair. Repairs were completed and the Vessel was back on hire on January 1, 2018. The additional off-hire and technical costs were subject to an insurance claim. Under its loss of hire insurance policies, the Partnership’s insurer paid the hire rate agreed in respect of the Carmen Knutsen for each day in excess of 14 deductible days while the Vessel was off-hire as a result of the repairs of the controllable pitch propeller. For the three and six months ended June 30, 2018, the Partnership recorded $0.45 million for loss of hire which were recorded as a component of total revenues since day rates are recovered under the terms of the policy.

For the year ended December 31, 2017, the Partnership recorded $2.40 million to vessel operating expense as an estimate of the cost of repairs of the controllable pitch propeller. For the six months ended June 30, 2018, an additional repair cost of $0.15 million was recorded to vessel operating expenses. As of June 30, 2018, the Partnership had received payments and recorded $2.25 million for hull and machinery repairs, resulting in a net expense of $0.30 million. See Note 5—Insurance Proceeds.

v3.19.2
Earnings per Unit and Cash Distributions
6 Months Ended
Jun. 30, 2019
Earnings per Unit and Cash Distributions  
Earnings per Unit and Cash Distributions

15) Earnings per Unit and Cash Distributions

The calculations of basic and diluted earnings per unit (1) are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands, except per unit data)

    

2019

    

2018

    

2019

 

2018

Net income

 

$

8,176

 

$

21,681

 

$

21,045

 

$

52,405

Less: Series A Preferred unitholders’ interest in net income

 

 

1,800

 

 

1,800

 

 

3,600

 

 

3,600

Net income attributable to the unitholders of KNOT Offshore Partners LP

 

 

6,376

 

 

19,881

 

 

17,445

 

 

48,805

Less: Distributions (2)

 

 

18,034

 

 

18,034

 

 

36,068

 

 

36,068

Under (over) distributed earnings

 

 

(11,658)

 

 

1,847

 

 

(18,623)

 

 

12,737

Under (over) distributed earnings  attributable to:

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders (3)

 

 

(11,442)

 

 

1,813

 

 

(18,279)

 

 

12,502

General Partner

 

 

(215)

 

 

34

 

 

(344)

 

 

235

Weighted average units outstanding (basic) (in thousands):

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders

 

 

32,694

 

 

32,694

 

 

32,694

 

 

32,694

General Partner

 

 

615

 

 

615

 

 

615

 

 

615

Weighted average units outstanding (diluted) (in thousands):

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders (4)

 

 

32,694

 

 

36,355

 

 

32,694

 

 

36,360

General Partner

 

 

615

 

 

615

 

 

615

 

 

615

Earnings per unit (basic)

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders

 

$

0.191

 

$

0.597

 

$

0.524

 

$

1.465

General Partner

 

 

0.191

 

 

0.597

 

 

0.524

 

 

1.465

Earnings per unit (diluted):

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders (4)

 

$

0.191

 

$

0.585

 

$

0.524

 

$

1.415

General Partner

 

 

0.191

 

 

0.597

 

 

0.524

 

 

1.465

Cash distributions declared and paid in the period per unit (5)

 

 

0.520

 

 

0.520

 

 

1.040

 

 

1.040

Subsequent event: Cash distributions declared and paid per unit relating to the period (6)

 

 

0.520

 

 

0.520

 

 

1.040

 

 

1.040


(1)

Earnings per unit have been calculated in accordance with the cash distribution provisions set forth in the Partnership Agreement.

(2)

This refers to distributions made or to be made in relation to the period irrespective of the declaration and payment dates and based on the number of units outstanding at the record date. This includes cash distributions to the IDR holder (KNOT) for the three months ended June 30, 2019 and 2018 of $0.7 million and for the six months ended June 30, 2019 and 2018 of $1.4 million.

(3)

This includes the net income attributable to the IDR holder. The net income attributable to IDRs for the three months ended June 30, 2019 and 2018 was $0.7 million and for the six months ended June 30, 2019 and 2018 was $1.4.

(4)

Diluted weighted average units outstanding and earnings per unit diluted for the three and six months ended June 30, 2019 does not reflect any potential common shares relating to the convertible preferred units since the assumed issuance of any additional shares would be anti-dilutive.

(5)

Refers to cash distributions declared and paid during the period.

(6)

Refers to cash distributions declared and paid subsequent to the period end.

As of June 30, 2019, 73.5% of the Partnership’s total number of common units outstanding representing limited partner interests were held by the public (in the form of 24,036,226 common units) and 26.2% of such units were held directly by KNOT (in the form of 8,567,500 common units). In addition, KNOT, through its ownership of the General Partner, held a 1.85% general partner interest (in the form of 615,117 general partner units) and a 0.3% limited partner interest (in the form of 90,368 common units).

Earnings per unit – basic is determined by dividing net income, after deducting the amount of net income attributable to the Series A Preferred Units and the distribution paid or to be made in relation to the period, by the weighted-average number of units outstanding during the applicable period.

The computation of limited partners’ interest in net income per common unit – diluted assumes the issuance of common units for all potentially dilutive securities consisting of 3,750,000 Series A Preferred Units. Consequently, the net income attributable to limited partners’ interest is exclusive of any distributions on the Series A Preferred Units. In addition, the weighted average number of common units outstanding has been increased assuming the Series A Preferred Units have been converted to common units using the if-converted method. The computation of limited partners’ interest in net income per common unit – diluted does not assume the issuance of Series A Preferred Units if the effect would be anti-dilutive.

The General Partner’s and common unitholders’ interest in net income was calculated as if all net income was distributed according to the terms of the Partnership Agreement, regardless of whether those earnings would or could be distributed. The Partnership Agreement does not provide for the distribution of net income. Rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter less the amount of cash reserves established by the Board to provide for the proper conduct of the Partnership’s business, including reserves for maintenance and replacement capital expenditures, anticipated credit needs and capital requirements and any accumulated distributions on, or redemptions of, the Series A Preferred Units. In addition, KNOT, as the initial holder of all IDRs, has the right, at the time when it has received incentive distributions at the highest level to which it is entitled (48.0% for each of the prior four consecutive fiscal quarters), to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Unlike available cash, net income is affected by non-cash items, such as depreciation and amortization, unrealized gains and losses on derivative instruments and unrealized foreign currency gains and losses.

v3.19.2
Acquisitions
6 Months Ended
Jun. 30, 2019
Acquisitions  
Acquisitions

16) Acquisitions

In March 2018, the Partnership acquired from KNOT equity interests in the subsidiary which own and operate the Anna Knutsen.

The Board and the Conflicts Committee approved the purchase price for the transaction. The Conflicts Committee retained a financial advisor to assist with its evaluation of the transaction. The details of the transaction are as follows:

 

 

 

 

 

 

    

Final

 

 

Anna Knutsen

 

 

March 1,

(U.S. Dollars in thousands)

 

2018

Purchase consideration (1)

 

$

19,913

Less: Fair value of net assets acquired:

 

 

  

Vessels and equipment (2)

 

 

120,274

Cash

 

 

4,537

Inventories

 

 

257

Derivative assets

 

 

1,839

Others current assets

 

 

111

Amounts due from related parties

 

 

520

Long-term debt

 

 

(84,217)

Long-term debt from related parties

 

 

(22,535)

Deferred debt issuance

 

 

1,228

Trade accounts payable

 

 

(971)

Accrued expenses

 

 

(1,013)

Amounts due to related parties

 

 

(117)

Subtotal

 

 

19,913

Difference between the purchase price and fair value of net assets acquired

 

$

 —


(1)

The purchase price is comprised of the following:

 

 

 

 

 

 

 

Final

 

 

AnnaKnutsen

 

 

March 1,

(U.S. Dollars in thousands)

    

2018

Cash consideration paid to KNOT (from KNOT)

 

$

14,637

Purchase price adjustments

 

 

5,276

Purchase price

 

$

19,913


(2)

Vessel and equipment includes allocation to drydocking of $2,329.

Anna Knutsen

On March 1, 2018, the Partnership’s wholly owned subsidiary, KNOT Shuttle Tankers AS, acquired KNOT’s 100% interest in KNOT 30, the company that owns and operates the Anna Knutsen. The purchase price for the vessel was $120.0 million, less $106.8 million of outstanding indebtedness, plus approximately $1.4 million for certain capitalized fees related to the financing of the vessel and plus other purchase price adjustments of $5.3 million.

Following of adoption of ASU 2017‑01, Business Combinations: Clarifying the Definition of a Business, the Partnership accounted for this acquisition as an acquisition of an asset. The cost of the group of assets acquired in the asset acquisition has been allocated to the individual assets acquired or liabilities assumed based on their relative fair values.

v3.19.2
Subsequent Events
6 Months Ended
Jun. 30, 2019
Subsequent Events  
Subsequent Events

17) Subsequent Events

The Partnership has evaluated subsequent events from the balance sheet date through August 29, 2019, the date at which the unaudited condensed consolidated interim financial statements were available to be issued, and determined that there are no other items to disclose, except as follows:

On July 16, 2019, a subsidiary of Shell exercised its option to extend the time charter of the vessel Windsor Knutsen by one additional year until October 2020.

On August 14, 2019, the Partnership paid a quarterly cash distribution of $0.52 per common unit with respect to the quarter ended June 30, 2019 to all common unitholders of record on July 26, 2019. On August 14, 2019, the Partnership paid a cash distribution to holders of Series A Preferred Units with respect to the quarter ended June 30, 2019 in an aggregate amount equal to $1.8 million.

 

v3.19.2
Summary of Significant Accounting Policies (Policies)
6 Months Ended
Jun. 30, 2019
Summary of Significant Accounting Policies  
Basis of Preparation

 

(a) Basis of Preparation

The accompanying unaudited condensed consolidated interim financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of management of the Partnership, all adjustments considered necessary for a fair presentation, which are of normal recurring nature, have been included. All intercompany balances and transactions are eliminated. The unaudited condensed consolidated financial statements do not include all the disclosures and information required for a complete set of annual financial statements; and, therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2018, which are included in the Partnership’s Annual Report on Form 20-F (the “2018 20-F”).

Significant accounting policies

 

(b) Significant Accounting Policies

Except as described below under (c)  Recent Accounting Pronouncements - Adoption of new accounting standards ”, the accounting policies adopted in the preparation of the unaudited condensed consolidated interim financial statements are consistent with those followed in the preparation of the Partnership’s audited consolidated financial statements for the year ended December 31, 2018, as contained in the Partnership’s 2018 20-F.

Recently Adopted Accounting Standards and New Accounting Standards Not Yet Adopted

(c) Recent Accounting Pronouncements

Adoption of new accounting standards

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, Leases (ASC 842), that amends the accounting guidance on leases for both lessors and lessees. On January 1, 2019, the Partnership adopted the new standard using the optional transition method to apply the new standard at the transition date of January 1, 2019 with no retrospective adjustments to prior periods. Consequently, the accounting and disclosures for the prior periods continue to be presented in accordance with the previous standard for leases.

The Partnership elected the package of practical expedients and has not reassessed whether any expired or existing contracts are, or contain leases, not reassessed lease classifications, and not reassessed initial direct costs for any existing leases. Additionally, the practical expedient of disregarding short-term leases for agreements with lease terms of 12 months or less as a lessee was adopted as an accounting policy for all underlying assets.

The Partnership’s time charter contracts include both a lease component, consisting of the lease of the vessel, and non-lease component, consisting of operation of the vessel for the customers. The Partnership has elected to use the practical expedient to not separate the non-lease component from the lease component for all such charters where the lease component is classified as an operating lease, and account for the combined components as an operating lease. Consequently, there were no changes to the timing or amount of revenue recognized, and therefore, no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessor accounting. Additional qualitative and quantitative disclosures are required and have been implemented for reporting periods beginning as of January 1, 2019, while prior periods are not adjusted and continue to be reported under the previous accounting standards. See Note 4—Operating Leases. The Partnership does not have any material leased assets. 

Adoption of the new standard resulted in recording a right-of-use asset and a lease liability on the consolidated balance sheet for operating leases of $2.3 million and $2.3 million, respectively, as of January 1, 2019. There was no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessee accounting. As of June 30, 2019, the right-of-use asset and lease liability for operating leases was $2.1 million and $2.1 million, respectively, and are presented in separate lines on the balance sheets. See Note 4—Operating Leases.

Accounting pronouncements to be adopted

Recently issued accounting pronouncements are not expected to materially impact the Partnership.

v3.19.2
Segment Information (Tables)
6 Months Ended
Jun. 30, 2019
Segment Information  
Schedule consolidated revenues and percentages of revenues for customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  June 30,

 

Six Months Ended June 30,

(U.S. Dollars in thousands)

    

2019

 

    

2018

 

    

2019

 

    

2018

 

Eni Trading and Shipping S.p.A.

 

$

11,134

 

16

%  

 

$

11,555

 

17

%  

 

$

22,146

 

16

%  

 

$

22,936

 

17

%

Fronape International Company, a subsidiary of Petrobras Transporte S.A.

 

 

11,249

 

16

%  

 

 

11,248

 

16

%  

 

 

22,378

 

16

%  

 

 

22,378

 

16

%

Repsol Sinopec Brasil, S.A., a subsidiary of Repsol Sinopec Brasil, B.V.

 

 

9,282

 

13

%  

 

 

9,283

 

13

%  

 

 

18,463

 

13

%  

 

 

18,222

 

13

%

Brazil Shipping I Limited, a subsidiary of Royal Dutch Shell

 

 

20,606

 

29

%  

 

 

20,399

 

29

%  

 

 

40,889

 

29

%  

 

 

40,572

 

30

%

Galp Sinopec Brasil Services B.V.

 

 

8,881

 

13

%  

 

 

6,438

 

 9

%  

 

 

17,584

 

12

%  

 

 

12,071

 

 9

%

 

v3.19.2
Operating Leases (Tables)
6 Months Ended
Jun. 30, 2019
Operating Leases  
Schedule of Partnership revenus by lease and non-lease contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  June 30,

 

Six Months Ended  June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Lease revenue from lease payment of operating leases

 

$

70,908

 

$

69,221

 

$

141,456

 

$

136,608

Non-lease revenues (loss of hire insurance recoveries and other income)

 

 

14

 

 

544

 

 

15

 

 

1,200

Total revenues

 

$

70,922

 

$

69,765

 

$

141,471

 

$

137,808

 

Schedule of minimum contractual future revenues

 

As of June 30, 2019, the minimum contractual future revenues to be received from time charters and bareboat charters during the next five years and thereafter are as follows:

 

 

 

 

(U.S. Dollars in thousands)

    

 

 

2019 (excluding the six months ended June 30, 2019)

 

$

136,536

2020

 

 

240,710

2021

 

 

219,841

2022

 

 

152,078

2023

 

 

63,918

2024 and therafter

 

 

28,674

Total

 

$

841,757

 

Schedule of maturity analysis of partnership's lease liabilities

 

A maturity analysis of the Partnership’s lease liabilities from leased-in equipment as of June 30, 2019 is as follows:

 

 

 

 

 

(U.S. Dollars in thousands)

    

    

 

2019 (excluding the six months ended June 30, 2019)

 

$

322

2020

 

 

644

2021

 

 

644

2022

 

 

644

Total

 

$

2,254

Less imputed interest

 

 

180

Carrying value of operating lease liabilities

 

$

2,074

 

v3.19.2
Other Finance Expenses (Tables)
6 Months Ended
Jun. 30, 2019
Other Finance Expenses  
Summary of components of interest cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Interest expense

 

$

12,529

 

$

11,830

 

$

25,530

 

$

21,848

Amortization of debt issuance cost and fair value of debt assumed

 

 

657

 

 

696

 

 

1,314

 

 

1,271

Total interest cost

 

$

13,186

 

$

12,526

 

$

26,844

 

$

23,119

 

Summary of components of other finance expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Bank fees, charges

 

$

224

 

$

151

 

$

281

 

$

241

Guarantee costs

 

 

 —

 

 

140

 

 

 —

 

 

282

Commitment fees

 

 

62

 

 

(3)

 

 

123

 

 

103

Total other finance expense

 

$

286

 

$

288

 

$

404

 

$

626

 

v3.19.2
Derivative Instruments (Tables)
6 Months Ended
Jun. 30, 2019
Derivative Instruments  
Schedule of realized and unrealized gains and losses recognized in earnings

:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Realized gain (loss):

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swap contracts

 

$

1,168

 

$

57

 

$

2,246

 

$

(247)

Foreign exchange forward contracts

 

 

(658)

 

 

134

 

 

(1,446)

 

 

1,239

Total realized gain (loss):

 

 

510

 

 

191

 

 

800

 

 

992

Unrealized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

(11,521)

 

 

2,995

 

 

(18,619)

 

 

11,942

Foreign exchange forward contracts

 

 

693

 

 

(1,218)

 

 

1,572

 

 

(990)

Total unrealized gain (loss):

 

 

(10,828)

 

 

1,777

 

 

(17,047)

 

 

10,952

Total realized and unrealized gain (loss) on derivative instruments:

 

$

(10,318)

 

$

1,968

 

$

(16,247)

 

$

11,944

 

v3.19.2
Fair Value Measurements (Tables)
6 Months Ended
Jun. 30, 2019
Fair Value Measurements  
Carrying amounts and estimated fair values of financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

    

Carrying 

    

Fair 

    

Carrying 

    

Fair 

(U.S. Dollars in thousands)

 

Amount  

 

Value  

 

Amount  

 

Value  

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,429

 

$

42,429

 

$

41,712

 

$

41,712

Current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

1,856

 

 

1,856

 

 

4,621

 

 

4,621

Foreign exchange forward contracts

 

 

125

 

 

125

 

 

                  —

 

 

                  —

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

914

 

 

914

 

 

11,667

 

 

11,667

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

132

 

 

132

 

 

                  —

 

 

                  —

Foreign exchange forward contracts

 

 

294

 

 

294

 

 

1,740

 

 

1,740

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

5,314

 

 

5,314

 

 

345

 

 

345

Long-term debt, current and non-current

 

 

1,045,686

 

 

1,045,686

 

 

1,087,347

 

 

1,087,347

 

Schedule of assets and liabilities measured at fair value on recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

at Reporting Date Using

 

 

 

 

 

Quoted Price

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Carrying

 

Markets for

 

Other

 

Significant

 

 

Value

 

Identical

 

Observable

 

Unobservable

 

 

June 30, 

 

Assets

 

Inputs

 

Inputs

(U.S. Dollars in thousands)

    

2019

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial assets:

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

42,429

 

$

42,429

 

$

 —

 

$

 —

Current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

1,856

 

 

 —

 

 

1,856

 

 

 —

Foreign exchange forward contracts

 

 

125

 

 

 —

 

 

125

 

 

 —

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

914

 

 

 —

 

 

914

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

132

 

 

 —

 

 

132

 

 

 —

Foreign exchange forward contracts

 

 

294

 

 

 —

 

 

294

 

 

 —

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

5,314

 

 

 —

 

 

5,314

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Long-term debt, current and non-current

 

 

1,045,686

 

 

 —

 

 

1,045,686

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

at Reporting Date Using

 

 

 

 

 

Quoted Price

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Carrying

 

Markets for

 

Other

 

Significant

 

 

Value

 

Identical

 

Observable

 

Unobservable

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

(U.S. Dollars in thousands)

    

2018

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,712

 

$

41,712

 

$

 

$

 —

Current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

4,621

 

 

 

 

4,621

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 —

 

 

 

 

 —

Non-current derivative assets:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

11,667

 

 

 

 

11,667

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 

 

 —

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

 —

 

 

 

 

 

 

 —

Foreign exchange forward contracts

 

 

1,740

 

 

 

 

1,740

 

 

 —

Non-current derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

  

Interest rate swap contracts

 

 

345

 

 

 

 

345

 

 

 —

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 

 

 —

Long-term debt, current and non-current

 

 

1,087,347

 

 

 

 

1,087,347

 

 

 —

 

v3.19.2
Income Taxes (Tables)
6 Months Ended
Jun. 30, 2019
Income Taxes  
Significant Components of Current and Deferred Income Tax Expense Attributable to Income from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

 

2018

 

Income before income taxes

 

$

8,179

 

$

21,684

 

$

21,051

 

$

52,411

 

Income tax (expense)

 

 

(3)

 

 

(3)

 

 

(6)

 

 

(6)

 

Effective tax rate

 

$

0

%  

$

0

%  

$

0

%

$

0

%

 

v3.19.2
Vessels and Equipment (Tables)
6 Months Ended
Jun. 30, 2019
Vessels and Equipment  
Schedule of vessels and equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

Vessels &

 

Accumulated

 

 

 

(U.S. Dollars in thousands)

 

equipment

 

depreciation

 

Net Vessels

Vessels, December 31, 2017

 

$

2,003,341

    

$

(280,318)

    

$

1,723,023

Additions

 

 

118,063

 

 

 —

 

 

118,063

Drydock costs

 

 

14,750

 

 

 —

 

 

14,750

Disposals

 

 

(5,731)

 

 

5,731

 

 

 —

Depreciation for the year

 

 

 —

 

 

(88,756)

 

 

(88,756)

Vessels, December 31, 2018

 

$

2,130,423

 

$

(363,343)

 

$

1,767,080

Additions

 

 

 —

 

 

 —

 

 

 —

Drydock costs

 

 

(69)

 

 

 —

 

 

(69)

Disposals

 

 

 —

 

 

 —

 

 

 —

Depreciation for the period

 

 

 —

 

 

(44,860)

 

 

(44,860)

Vessels, June 30, 2019

 

$

2,130,354

 

$

(408,203)

 

$

1,722,151

 

v3.19.2
Intangible Assets (Tables)
6 Months Ended
Jun. 30, 2019
Intangible Assets  
Schedule of intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

Above market

 

Above market

 

 

 

 

    

time charter

    

time charter

    

Total

(U.S. Dollars in thousands)

 

Tordis Knutsen

 

Vigdis Knutsen

 

intangibles

Intangibles, December 31, 2017

 

$

1,215

 

$

1,282

 

$

2,497

Additions

 

 

 —

 

 

 —

 

 

 —

Amortization for the year

 

 

(304)

 

 

(302)

 

 

(606)

Intangibles, December 31, 2018

 

$

911

 

$

980

 

$

1,891

Additions

 

 

 —

 

 

 —

 

 

 —

Amortization for the period

 

 

(151)

 

 

(151)

 

 

(302)

Intangibles, June 30, 2019

 

$

760

 

$

829

 

$

1,589

 

v3.19.2
Long-Term Debt (Tables)
6 Months Ended
Jun. 30, 2019
Long-Term Debt.  
Schedule of Long-Term Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

(U.S. Dollars in thousands)

    

Vessel

    

2019

    

2018

$320 million loan facility

 

Windsor Knutsen, Bodil Knutsen, Carmen Knutsen, Fortaleza Knutsen, Recife Knutsen, Ingrid Knutsen

 

$

297,416

 

$

312,472

$55 million revolving credit facility

 

 

 

 

26,279

 

 

26,279

Hilda loan facility

 

Hilda Knutsen

 

 

87,692

 

 

90,769

Torill loan facility

 

Torill Knutsen

 

 

91,667

 

 

95,000

$172.5 million loan facility

 

Dan Cisne, Dan Sabia

 

 

76,839

 

 

81,839

Raquel loan facility

 

Raquel Knutsen

 

 

60,569

 

 

63,184

Tordis loan facility

 

Tordis Knutsen

 

 

83,461

 

 

85,991

Vigdis loan facility

 

Vigdis Knutsen

 

 

84,726

 

 

87,256

Lena loan facility

 

Lena Knutsen

 

 

83,300

 

 

85,750

Brasil loan facility

 

Brasil Knutsen

 

 

60,423

 

 

63,454

Anna loan facility

 

Anna Knutsen

 

 

68,314

 

 

70,353

$25 million revolving credit facility

 

  

 

 

25,000

 

 

25,000

Total long-term debt

 

  

 

 

1,045,686

 

 

1,087,347

Less: current installments

 

  

 

 

85,845

 

 

109,534

Less: unamortized deferred loan issuance costs

 

  

 

 

2,560

 

 

2,608

Current portion of long-term debt

 

  

 

 

83,285

 

 

106,926

Amounts due after one year

 

  

 

 

959,841

 

 

977,813

Less: unamortized deferred loan issuance costs

 

  

 

 

6,161

 

 

7,448

Long-term debt, less current installments, and unamortized deferred loan issuance costs

 

  

 

$

953,680

 

$

970,365

 

Summary of Partnership's Outstanding Debt Repayable

The Partnership’s outstanding debt of $1,045.7 million as of June 30, 2019 is repayable as follows:

 

 

 

 

 

 

 

 

(U.S. Dollars in thousands)

    

Period repayment

    

Balloon repayment

Remainder of 2019

 

$

42,873

 

$

 —

2020

 

 

85,945

 

 

 —

2021

 

 

86,545

 

 

95,811

2022

 

 

71,210

 

 

236,509

2023

 

 

55,535

 

 

202,185

2024 and thereafter

 

 

15,180

 

 

153,893

Total

 

$

357,288

 

$

688,398

 

v3.19.2
Related Party Transactions (Tables)
6 Months Ended
Jun. 30, 2019
Related Party Transactions  
Schedule of Related Party Costs and Expenses

Net expenses (income) from related parties included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands)

    

2019

    

2018

    

2019

 

2018

Statements of operations:

 

 

  

 

 

  

 

 

  

 

 

  

Other income:

 

 

  

 

 

  

 

 

  

 

 

  

Guarantee income from KNOT (1) 

 

$

 —

 

$

94

 

$

 —

 

$

749

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Technical and operational management fee from KNOT to Vessels (2) 

 

 

1,736

 

 

1,509

 

 

3,479

 

 

3,019

General and administrative expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Administration fee from KNOT Management (3)

 

 

314

 

 

449

 

 

648

 

 

812

Administration fee from KOAS (3)

 

 

174

 

 

148

 

 

345

 

 

290

Administration fee from KOAS UK (3)

 

 

30

 

 

30

 

 

60

 

 

60

Administration and management fee from KNOT (4)

 

 

42

 

 

41

 

 

85

 

 

80

Total

 

$

2,296

 

$

2,083

 

$

4,617

 

$

3,512

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

(U.S. Dollars in thousands)

    

  2019

    

2018

Balance Sheet:

 

 

  

 

 

  

Vessels:

 

 

  

 

 

  

Drydocking supervision fee from KNOT (5)

 

$

 —

 

$

187

Drydocking supervision fee from KOAS (5)

 

 

 —

 

 

24

Total

 

$

 —

 

$

211


(1)

Guarantee income from KNOT:  Pursuant to the Omnibus Agreement, KNOT agreed to guarantee the payments of the hire rate under the initial charter of the Bodil Knutsen and Windsor Knutsen for a period of five years from the closing date of the IPO (until April 15, 2018). In October 2015, the Windsor Knutsen commenced on a new Shell time charter with a hire rate below the hire rate in the initial charter. The difference between the new hire rate and the initial rate was paid by KNOT until April 15, 2018. See Note 13(b)—Related Party Transactions—Guarantees and Indemnifications.

(2)

Technical and operational management fee from KNOT Management or KNOT Management Denmark to Vessels: KNOT Management or KNOT Management Denmark provides technical and operational management of the vessels on time charter including crewing, purchasing, maintenance and other operational service. In addition, there is also a charge for 24‑hour emergency response services provided by KNOT Management for all vessels managed by KNOT Management.

(3)

Administration fee from KNOT Management, Knutsen OAS Shipping AS (“KOAS”) and Knutsen OAS (UK) Ltd. (“KOAS UK”) : Administration costs include the compensation and benefits of KNOT Management’s management and administrative staff as well as other general and administration expenses. Some benefits are also provided by KOAS and KOAS UK. Net administration costs are total administration cost plus a 5% margin, reduced for the total fees for services delivered by the administration staffs and the estimated shareholder costs for KNOT that have not been allocated. As such, the level of net administration costs as a basis for the allocation can vary from year to year based on the administration and financing services offered by KNOT to all the vessels in its fleet each year. KNOT Management also charges each subsidiary a fixed annual fee for the preparation of the statutory financial statement.

(4)

Administration and management fee from KNOT Management and KNOT Management Denmark: For bareboat charters, the shipowner is not responsible for providing crewing or other operational services and the customer is responsible for all vessel operating expenses and voyage expenses. However, each of the vessels under bareboat charters is subject to a management and administration agreement with either KNOT Management or KNOT Management Denmark, pursuant to which these companies provide general monitoring services for the vessels in exchange for an annual fee.

(5)

Drydocking supervision fee from KNOT and KOAS : KNOT and KOAS provide supervision and hire out service personnel during drydocking of the vessels. The fee is calculated as a daily fixed fee.

Summary of Amounts Due from (to) Related Parties

 

 

 

 

 

 

 

 

 

 

 

At June 30, 

 

At December 31, 

(U.S. Dollars in thousands)

    

2019

    

2018

Balance Sheet:

 

 

  

 

 

  

Trading balances due from KOAS

 

$

578

 

$

466

Trading balances due from KNOT and affiliates

 

 

926

 

 

675

Amount due from related parties

 

$

1,504

 

$

1,141

Trading balances due to KOAS

 

$

688

 

$

629

Trading balances due to KNOT and affiliates

 

 

501

 

 

441

Amount due to related parties

 

$

1,189

 

$

1,070

 

Schedule of Trade Accounts Payable to Related Parties

 

 

 

 

 

 

 

 

 

 

 

At June 30, 

 

At December 31, 

(U.S. Dollars in thousands)

    

2019

    

2018

Balance Sheet:

 

 

  

 

 

  

Trading balances due to KOAS

 

$

552

 

$

381

Trading balances due to KNOT and affiliates

 

 

382

 

 

411

Trade accounts payable to related parties

 

$

934

 

$

792

 

v3.19.2
Earnings per Unit and Cash Distributions (Tables)
6 Months Ended
Jun. 30, 2019
Earnings per Unit and Cash Distributions  
Schedule of calculations of basic and diluted earnings per unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(U.S. Dollars in thousands, except per unit data)

    

2019

    

2018

    

2019

 

2018

Net income

 

$

8,176

 

$

21,681

 

$

21,045

 

$

52,405

Less: Series A Preferred unitholders’ interest in net income

 

 

1,800

 

 

1,800

 

 

3,600

 

 

3,600

Net income attributable to the unitholders of KNOT Offshore Partners LP

 

 

6,376

 

 

19,881

 

 

17,445

 

 

48,805

Less: Distributions (2)

 

 

18,034

 

 

18,034

 

 

36,068

 

 

36,068

Under (over) distributed earnings

 

 

(11,658)

 

 

1,847

 

 

(18,623)

 

 

12,737

Under (over) distributed earnings  attributable to:

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders (3)

 

 

(11,442)

 

 

1,813

 

 

(18,279)

 

 

12,502

General Partner

 

 

(215)

 

 

34

 

 

(344)

 

 

235

Weighted average units outstanding (basic) (in thousands):

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders

 

 

32,694

 

 

32,694

 

 

32,694

 

 

32,694

General Partner

 

 

615

 

 

615

 

 

615

 

 

615

Weighted average units outstanding (diluted) (in thousands):

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders (4)

 

 

32,694

 

 

36,355

 

 

32,694

 

 

36,360

General Partner

 

 

615

 

 

615

 

 

615

 

 

615

Earnings per unit (basic)

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders

 

$

0.191

 

$

0.597

 

$

0.524

 

$

1.465

General Partner

 

 

0.191

 

 

0.597

 

 

0.524

 

 

1.465

Earnings per unit (diluted):

 

 

  

 

 

  

 

 

  

 

 

  

Common unitholders (4)

 

$

0.191

 

$

0.585

 

$

0.524

 

$

1.415

General Partner

 

 

0.191

 

 

0.597

 

 

0.524

 

 

1.465

Cash distributions declared and paid in the period per unit (5)

 

 

0.520

 

 

0.520

 

 

1.040

 

 

1.040

Subsequent event: Cash distributions declared and paid per unit relating to the period (6)

 

 

0.520

 

 

0.520

 

 

1.040

 

 

1.040


(1)

Earnings per unit have been calculated in accordance with the cash distribution provisions set forth in the Partnership Agreement.

(2)

This refers to distributions made or to be made in relation to the period irrespective of the declaration and payment dates and based on the number of units outstanding at the record date. This includes cash distributions to the IDR holder (KNOT) for the three months ended June 30, 2019 and 2018 of $0.7 million and for the six months ended June 30, 2019 and 2018 of $1.4 million.

(3)

This includes the net income attributable to the IDR holder. The net income attributable to IDRs for the three months ended June 30, 2019 and 2018 was $0.7 million and for the six months ended June 30, 2019 and 2018 was $1.4.

(4)

Diluted weighted average units outstanding and earnings per unit diluted for the three and six months ended June 30, 2019 does not reflect any potential common shares relating to the convertible preferred units since the assumed issuance of any additional shares would be anti-dilutive.

(5)

Refers to cash distributions declared and paid during the period.

(6)

Refers to cash distributions declared and paid subsequent to the period end.

v3.19.2
Acquisitions (Tables)
6 Months Ended
Jun. 30, 2019
Acquisitions  
Schedule of purchase price for the transaction

 

 

 

 

 

 

 

    

Final

 

 

Anna Knutsen

 

 

March 1,

(U.S. Dollars in thousands)

 

2018

Purchase consideration (1)

 

$

19,913

Less: Fair value of net assets acquired:

 

 

  

Vessels and equipment (2)

 

 

120,274

Cash

 

 

4,537

Inventories

 

 

257

Derivative assets

 

 

1,839

Others current assets

 

 

111

Amounts due from related parties

 

 

520

Long-term debt

 

 

(84,217)

Long-term debt from related parties

 

 

(22,535)

Deferred debt issuance

 

 

1,228

Trade accounts payable

 

 

(971)

Accrued expenses

 

 

(1,013)

Amounts due to related parties

 

 

(117)

Subtotal

 

 

19,913

Difference between the purchase price and fair value of net assets acquired

 

$

 —


(1)

The purchase price is comprised of the following:

 

 

 

 

 

 

 

Final

 

 

AnnaKnutsen

 

 

March 1,

(U.S. Dollars in thousands)

    

2018

Cash consideration paid to KNOT (from KNOT)

 

$

14,637

Purchase price adjustments

 

 

5,276

Purchase price

 

$

19,913


(2)

Vessel and equipment includes allocation to drydocking of $2,329.

v3.19.2
Description of Business (Details)
$ in Millions
1 Months Ended
Apr. 30, 2013
item
Aug. 28, 2019
USD ($)
Jun. 30, 2019
item
director
Jun. 30, 2018
item
Description of Business        
Ownership interest in shuttle tankers acquired at formation (as a percent) 100.00%      
Number of shuttle tankers acquired at formation | item 4      
Number of operating vessels | item     16 16
Undrawn portion of revolving credit facilities | $   $ 28.7    
Number of members on board of directors electable by common unitholders | director     4  
Total number of board members | director     7  
v3.19.2
Summary of Significant Accounting Policies - Adoption of new accounting standards (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Jan. 01, 2019
Summary of Significant Accounting Policies    
Right of use asset $ 2,075 $ 2,300
Lease liability $ 2,074 $ 2,300
v3.19.2
Segment Information (Details)
3 Months Ended 6 Months Ended
Jun. 30, 2019
segment
item
Jun. 30, 2018
item
Jun. 30, 2019
item
Jun. 30, 2018
item
Segment Information        
Number of reportable segments | segment 1      
Number of vessels 16 16 16 16
Number of time charters 12 12 12 12
Number of bareboat charters 4 4 4 4
Minimum | Revenues | Customer Concentration Risk        
Segment Information        
Benchmark percentage of revenues and combined revenues concentration 10.00% 10.00% 10.00% 10.00%
v3.19.2
Segment Information - Schedule of consolidated revenues and percentages of revenues for customers (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Segment Information        
Revenues $ 70,922 $ 69,765 $ 141,471 $ 137,808
Eni Trading and Shipping S.p.A.        
Segment Information        
Revenues 11,134 11,555 22,146 22,936
Fronape International Company, a subsidiary of Petrobras Transporte S.A        
Segment Information        
Revenues 11,249 11,248 22,378 22,378
Repsol Sinopec Brasil, S.A., a subsidiary of Repsol Sinopec Brasil, B.V.        
Segment Information        
Revenues 9,282 9,283 18,463 18,222
Brazil Shipping I Limited, a subsidiary of Royal Dutch Shell        
Segment Information        
Revenues 20,606 20,399 40,889 40,572
Galp Sinopec Brasil Services B.V        
Segment Information        
Revenues $ 8,881 $ 6,438 $ 17,584 $ 12,071
Customer Concentration Risk | Revenues | Eni Trading and Shipping S.p.A.        
Segment Information        
Percentage of partnership's consolidated revenues 16.00% 17.00% 16.00% 17.00%
Customer Concentration Risk | Revenues | Fronape International Company, a subsidiary of Petrobras Transporte S.A        
Segment Information        
Percentage of partnership's consolidated revenues 16.00% 16.00% 16.00% 16.00%
Customer Concentration Risk | Revenues | Repsol Sinopec Brasil, S.A., a subsidiary of Repsol Sinopec Brasil, B.V.        
Segment Information        
Percentage of partnership's consolidated revenues 13.00% 13.00% 13.00% 13.00%
Customer Concentration Risk | Revenues | Brazil Shipping I Limited, a subsidiary of Royal Dutch Shell        
Segment Information        
Percentage of partnership's consolidated revenues 29.00% 29.00% 29.00% 30.00%
Customer Concentration Risk | Revenues | Galp Sinopec Brasil Services B.V        
Segment Information        
Percentage of partnership's consolidated revenues 13.00% 9.00% 12.00% 9.00%
v3.19.2
Operating Leases (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Operating Leases        
Lease revenue from lease payment of operating leases $ 70,908 $ 69,221 $ 141,456 $ 136,608
Non-lease revenues (loss of hire insurance recoveries and other income) 14 544 15 1,200
Total Revenues $ 70,922 $ 69,765 $ 141,471 $ 137,808
v3.19.2
Operating Leases - Minimum contractual future revenues (Details)
$ in Thousands
Jun. 30, 2019
USD ($)
Operating Leases  
2019 (excluding the six months ended June 30,2019) $ 136,536
2020 240,710
2021 219,841
2022 152,078
2023 63,918
2024 and thereafter 28,674
Total $ 841,757
v3.19.2
Operating Leases - Additional Information (Details)
1 Months Ended 6 Months Ended
Mar. 31, 2019
Jun. 30, 2019
Oct. 31, 2015
Fortaleza Knutsen      
Operating Leases      
Current bareboat charter expiration year   2023  
Recife Knutsen      
Operating Leases      
Current bareboat charter expiration year   2023  
Bodil Knutsen      
Operating Leases      
Current time charter expiration year   2020  
Time charter expiration year under options to extend   2024  
Windsor Knutsen      
Operating Leases      
Time charter expiration year under options to extend   2023  
Term of time charter     2 years
Windsor Knutsen | Minimum      
Operating Leases      
Period of suspension of time charter 10 months    
Windsor Knutsen | Maximum      
Operating Leases      
Period of suspension of time charter 12 months    
Carmen Knutsen      
Operating Leases      
Current time charter expiration year   2023  
Time charter expiration year under options to extend   2026  
Hilda Knutsen      
Operating Leases      
Current time charter expiration year   2022  
Time charter expiration year under options to extend   2025  
Torill Knutsen      
Operating Leases      
Current time charter expiration year   2023  
Dan Cisne      
Operating Leases      
Current bareboat charter expiration year   2023  
Dan Sabia      
Operating Leases      
Current bareboat charter expiration year   2024  
Ingrid Knutsen      
Operating Leases      
Current time charter expiration year   2024  
Time charter expiration year under options to extend   2029  
Raquel Knutsen      
Operating Leases      
Current time charter expiration year   2025  
Time charter expiration year under options to extend   2030  
Tordis Knutsen      
Operating Leases      
Current time charter expiration year   2022  
Time charter expiration year under options to extend   2032  
Vigdis Knutsen      
Operating Leases      
Current time charter expiration year   2022  
Time charter expiration year under options to extend   2032  
Lena Knutsen      
Operating Leases      
Current time charter expiration year   2022  
Time charter expiration year under options to extend   2032  
Brasil Knutsen      
Operating Leases      
Current time charter expiration year   2022  
Time charter expiration year under options to extend   2028  
Anna Knutsen      
Operating Leases      
Current time charter expiration year   2022  
Time charter expiration year under options to extend   2028  
v3.19.2
Operating Leases - Other Information (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2019
Jan. 01, 2019
Operating Leases      
Right-of-use assets (Note 4) $ 2,075 $ 2,075 $ 2,300
Lease liability 2,074 2,074 $ 2,300
Operating lease payments $ 200 $ 300  
Weighted average discount rate (as a percent) 4.80% 4.80%  
Weighted average remaining lease term 3 years 6 months 3 years 6 months  
v3.19.2
Operating Leases - Maturity analysis of the lease liabilities (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Jan. 01, 2019
Operating Leases    
2019 (excluding the six months ended June 30, 2019) $ 322  
2020 644  
2021 644  
2022 644  
Total 2,254  
Less imputed interest 180  
Carrying value of operating lease liabilities $ 2,074 $ 2,300
v3.19.2
Insurance Proceeds (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2017
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2017
Insurance Proceeds            
Deductible period under business interruption insurance       14 days    
Period of coverage under business interruption insurance       180 days    
Loss of hire insurance payments recorded as a component of total revenues   $ 450     $ 450  
Net vessel operating expense $ 15,301 13,974   $ 29,757 27,221  
Carmen Knutsen            
Insurance Proceeds            
Special survey drydocking period     5 years      
Deductible period under business interruption insurance     14 days      
Carmen Knutsen | Technical Default in Controllable Pitch Propeller            
Insurance Proceeds            
Loss of hire insurance payments recorded as a component of total revenues $ 450 $ 450   450 450  
Recoveries for repairs       2,250 2,250  
Cost of repairs       150 150 $ 2,400
Net vessel operating expense       $ 300 $ 300  
v3.19.2
Other Finance Expenses - Components Interest Cost (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Other Finance Expenses        
Interest expense $ 12,529 $ 11,830 $ 25,530 $ 21,848
Amortization of debt issuance cost and fair value of debt assumed 657 696 1,314 1,271
Total interest cost $ 13,186 $ 12,526 $ 26,844 $ 23,119
v3.19.2
Other Finance Expenses - Components of Other Finance Expense (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Other Finance Expenses        
Bank fees, charges $ 224 $ 151 $ 281 $ 241
Guarantee costs   140   282
Commitment fees 62 (3) 123 103
Total other finance expense $ 286 $ 288 $ 404 $ 626
v3.19.2
Derivative Instruments - Additional Information (Details)
kr in Millions, $ in Millions
Jun. 30, 2019
USD ($)
Jun. 30, 2019
NOK (kr)
Dec. 31, 2018
USD ($)
Dec. 31, 2018
NOK (kr)
Interest Rate Swap Contracts        
Derivative Instruments        
Notional amount $ 571.5   $ 555.5  
Carrying amount of derivative asset $ 2.7   15.9  
Weighted average interest rate 1.88% 1.88%    
Foreign Exchange Forward Contracts        
Derivative Instruments        
Notional amount | kr   kr 169.0   kr 244.2
Carrying amount of derivative liabilities $ 0.2      
Carrying amount of derivative asset     $ 1.7  
v3.19.2
Derivative Instruments - Realized and Unrealized Gains and Losses Recognized in Earnings (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Net gain (loss) on derivative instruments        
Realized gain (loss) $ 510 $ 191 $ 800 $ 992
Unrealized gain (loss) (10,828) 1,777 (17,047) 10,952
Total realized and unrealized gain (loss) on derivative instruments (10,318) 1,968 (16,247) 11,944
Interest Rate Swap Contracts        
Net gain (loss) on derivative instruments        
Realized gain (loss) 1,168 57 2,246 (247)
Unrealized gain (loss) (11,521) 2,995 (18,619) 11,942
Foreign Exchange Forward Contracts        
Net gain (loss) on derivative instruments        
Realized gain (loss) (658) 134 (1,446) 1,239
Unrealized gain (loss) $ 693 $ (1,218) $ 1,572 $ (990)
v3.19.2
Fair Value Measurements - Carrying Amounts and Estimated Fair Values of Partnership 's Financial Instruments (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Financial assets:    
Current derivative assets $ 1,981 $ 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 426 1,740
Non-current derivative liabilities 5,314 345
Carrying Amount    
Financial assets:    
Cash and cash equivalents 42,429 41,712
Financial liabilities:    
Long-term debt, current and non-current 1,045,686 1,087,347
Carrying Amount | Interest Rate Swap Contracts    
Financial assets:    
Current derivative assets 1,856 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 132  
Non-current derivative liabilities 5,314 345
Carrying Amount | Foreign Exchange Forward Contracts    
Financial assets:    
Current derivative assets 125  
Financial liabilities:    
Current derivative liabilities 294 1,740
Fair Value    
Financial assets:    
Cash and cash equivalents 42,429 41,712
Financial liabilities:    
Long-term debt, current and non-current 1,045,686 1,087,347
Fair Value | Interest Rate Swap Contracts    
Financial assets:    
Current derivative assets 1,856 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 132  
Non-current derivative liabilities 5,314 345
Fair Value | Foreign Exchange Forward Contracts    
Financial assets:    
Current derivative assets 125  
Financial liabilities:    
Current derivative liabilities $ 294 $ 1,740
v3.19.2
Fair Value Measurements - Additional Information (Details) - USD ($)
6 Months Ended 12 Months Ended
Jun. 30, 2019
Dec. 31, 2018
Fair Value, assets and liabilities measured on recurring and nonrecurring basis    
Deferred debt issuance cost $ 8,700,000 $ 10,100,000
Restricted cash $ 0 $ 0
Interest Rate Swap Contracts    
Fair Value, assets and liabilities measured on recurring and nonrecurring basis    
Weighted average remaining terms 4 years 4 months 24 days 4 years 10 months 24 days
Interest Rate Swap Contracts | Minimum    
Fair Value, assets and liabilities measured on recurring and nonrecurring basis    
Notional amount per contract $ 9,300,000 $ 10,000,000
Fixed interest rate 1.38% 1.38%
Interest Rate Swap Contracts | Maximum    
Fair Value, assets and liabilities measured on recurring and nonrecurring basis    
Notional amount per contract $ 50,000,000 $ 50,000,000
Fixed interest rate 2.90% 2.90%
v3.19.2
Fair Value Measurements - Fair Value Hierarchy (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Financial assets:    
Current derivative assets $ 1,981 $ 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 426 1,740
Non-current derivative liabilities 5,314 345
Carrying Amount    
Financial assets:    
Cash and cash equivalents 42,429 41,712
Financial liabilities:    
Long-term debt, current and non-current 1,045,686 1,087,347
Fair Value    
Financial assets:    
Cash and cash equivalents 42,429 41,712
Financial liabilities:    
Long-term debt, current and non-current 1,045,686 1,087,347
Foreign Exchange Forward Contracts | Carrying Amount    
Financial assets:    
Current derivative assets 125  
Financial liabilities:    
Current derivative liabilities 294 1,740
Foreign Exchange Forward Contracts | Fair Value    
Financial assets:    
Current derivative assets 125  
Financial liabilities:    
Current derivative liabilities 294 1,740
Interest Rate Swap Contracts | Carrying Amount    
Financial assets:    
Current derivative assets 1,856 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 132  
Non-current derivative liabilities 5,314 345
Interest Rate Swap Contracts | Fair Value    
Financial assets:    
Current derivative assets 1,856 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 132  
Non-current derivative liabilities 5,314 345
Quoted Price in Active Markets for Identical Assets (Level 1) | Fair Value    
Financial assets:    
Cash and cash equivalents 42,429 41,712
Significant Other Observable Inputs (Level 2) | Fair Value    
Financial liabilities:    
Long-term debt, current and non-current 1,045,686 1,087,347
Significant Other Observable Inputs (Level 2) | Foreign Exchange Forward Contracts | Fair Value    
Financial assets:    
Current derivative assets 125  
Financial liabilities:    
Current derivative liabilities 294 1,740
Significant Other Observable Inputs (Level 2) | Interest Rate Swap Contracts | Fair Value    
Financial assets:    
Current derivative assets 1,856 4,621
Non-current derivative assets 914 11,667
Financial liabilities:    
Current derivative liabilities 132  
Non-current derivative liabilities $ 5,314 $ 345
v3.19.2
Fair Value Measurements - Fair Value transfers into or out of Level 1, Level 2 or Level 3 (Details) - USD ($)
6 Months Ended 12 Months Ended
Jun. 30, 2019
Dec. 31, 2018
Fair Value Measurements    
Transfers amount Fair value assets level 1 to level 2 $ 0 $ 0
Transfers amount Fair value assets level 2 to level 1 0 0
Transfers amount Fair value liabilities level 1 to level 2 0 0
Transfers amount Fair value liabilities level 2 to level 1 0 0
Transfers amount Fair value assets level 3 to level 1 0 0
Transfers amount Fair value assets level 3 to level 2 0 0
Transfers amount Fair value liabilities level 3 to level 1 0 0
Transfers amount Fair value liabilities level 3 to level 2 $ 0 $ 0
v3.19.2
Income Taxes - Additional information (Details) - USD ($)
3 Months Ended 6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Mar. 31, 2013
Income Taxes            
Ordinary income tax rate     22.00% 23.00%    
Entrance tax         $ 20 $ 3,000,000
Entrance tax paid, current $ 100,000 $ 200,000        
Entrance tax payable, non current     $ 500,000      
v3.19.2
Income Taxes - Significant Components of Current and Deferred Income Tax Expense Attributable to Income from Continuing Operations (Details) - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Income Taxes          
Income before income taxes $ 8,179,000 $ 21,684,000 $ 21,051,000 $ 52,411,000  
Income tax (expense) $ 3,000 $ 3,000 $ 6,000 $ 6,000  
Effective tax rate 0.00% 0.00% 0.00% 0.00%  
Deferred tax assets recognized $ 0   $ 0   $ 0
v3.19.2
Vessels and Equipment - Pledged Assets (Details) - USD ($)
$ in Millions
Jun. 30, 2019
Dec. 31, 2018
Vessels and Equipment    
Book value of assets pledged as security for long-term debt $ 1,722 $ 1,767
v3.19.2
Vessels and Equipment - Schedule of Property Plant and Equipment (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Vessels & equipment - Activity          
Vessels and equipment, beginning balance     $ 2,130,423 $ 2,003,341 $ 2,003,341
Additions         118,063
Drydock costs     (69)   14,750
Disposals         (5,731)
Vessels and equipment, ending balance $ 2,130,354   2,130,354   2,130,423
Accumulated depreciation - Activity          
Accumulated depreciation, beginning balance     (363,343) (280,318) (280,318)
Accumulated depreciation, disposals         5,731
Depreciation for the period (22,429) $ (22,332) (44,860) (43,906) (88,756)
Accumulated depreciation, ending balance (408,203)   (408,203)   (363,343)
Net Vessels - Activity          
Net vessel, beginning balance     1,767,080 1,723,023 1,723,023
Additions         118,063
Drydock costs     (69)   14,750
Depreciation for the period (22,429) $ (22,332) (44,860) $ (43,906) (88,756)
Net vessel, ending balance $ 1,722,151   $ 1,722,151   $ 1,767,080
v3.19.2
Intangible Assets - Schedule of Intangible Assets (Details) - USD ($)
$ in Thousands
6 Months Ended 12 Months Ended
Jun. 30, 2019
Dec. 31, 2018
Intangible Assets    
Intangibles assets, beginning balance $ 1,891 $ 2,497
Amortization for the period (302) (606)
Intangibles assets, ending balance 1,589 1,891
Above Market Value Of Time Charter | Tordis Knutsen    
Intangible Assets    
Intangibles assets, beginning balance 911 1,215
Amortization for the period (151) (304)
Intangibles assets, ending balance 760 911
Above Market Value Of Time Charter | Vigdis Knutsen    
Intangible Assets    
Intangibles assets, beginning balance 980 1,282
Amortization for the period (151) (302)
Intangibles assets, ending balance $ 829 $ 980
v3.19.2
Intangible Assets - Additional Information (Details) - Above Market Value Of Time Charter
6 Months Ended
Jun. 30, 2019
Tordis Knutsen  
Intangible Assets  
Remaining term of the contract 4 years 9 months 18 days
Vigdis Knutsen  
Intangible Assets  
Remaining term of the contract 4 years 10 months 24 days
v3.19.2
Long-Term Debt - Components (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Long-Term Debt    
Long-term debt $ 1,045,686 $ 1,087,347
Less: current installments 85,845 109,534
Less: unamortized deferred loan issuance costs 2,560 2,608
Current portion of long-term debt 83,285 106,926
Amounts due after one year 959,841 977,813
Less: unamortized deferred loan issuance costs 6,161 7,448
Long-term debt, less current installments, and unamortized deferred loan issuance costs 953,680 970,365
$320 million loan facility    
Long-Term Debt    
Long-term debt 297,416 312,472
Debt instrument face amount 320,000 320,000
$55 million revolving credit facility    
Long-Term Debt    
Long-term debt 26,279 26,279
Debt instrument face amount 55,000 55,000
Hilda Loan Facility    
Long-Term Debt    
Long-term debt 87,692 90,769
Torill Loan Facility    
Long-Term Debt    
Long-term debt 91,667 95,000
$172.5 million loan facility    
Long-Term Debt    
Long-term debt 76,839 81,839
Debt instrument face amount 172,500 172,500
Raquel Loan Facility    
Long-Term Debt    
Long-term debt 60,569 63,184
Tordis Loan Facility    
Long-Term Debt    
Long-term debt 83,461 85,991
Vigdis Loan Facility    
Long-Term Debt    
Long-term debt 84,726 87,256
Lena Loan Facility    
Long-Term Debt    
Long-term debt 83,300 85,750
Brasil Loan Facility    
Long-Term Debt    
Long-term debt 60,423 63,454
Anna loan facility    
Long-Term Debt    
Long-term debt 68,314 70,353
$25 million revolving credit facility    
Long-Term Debt    
Long-term debt 25,000 25,000
Debt instrument face amount $ 25,000 $ 25,000
v3.19.2
Long-Term Debt - Summary of Partnership's Outstanding Debt Repayable (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Debt Instrument, Redemption [Line Items]    
Total long-term debt $ 1,045,686 $ 1,087,347
Periodic repayment    
Debt Instrument, Redemption [Line Items]    
Reminder of 2019 42,873  
2020 85,945  
2021 86,545  
2022 71,210  
2023 55,535  
2024 and thereafter 15,180  
Total long-term debt 357,288  
Balloon Repayment    
Debt Instrument, Redemption [Line Items]    
2021 95,811  
2022 236,509  
2023 202,185  
2024 and thereafter 153,893  
Total long-term debt $ 688,398  
v3.19.2
Long-Term Debt - Additional Information (Details) - Partnership's Loan Agreements - London Interbank Offered Rate (LIBOR)
6 Months Ended
Jun. 30, 2019
Minimum  
Long-Term Debt  
Long-term debt, fixed margin percentage 1.80%
Maximum  
Long-Term Debt  
Long-term debt, fixed margin percentage 2.40%
v3.19.2
Long-Term Debt - $25 Million Revolving Credit Facility (Details) - $25 million revolving credit facility
$ in Millions
Jun. 28, 2019
USD ($)
Long-Term Debt  
Credit facility amount $ 25
Interest margin percentage 1.80%
Commitment fee percentage 0.50%
v3.19.2
Related Party Transactions - Additional Information (Details) - KNOT
$ in Millions
1 Months Ended
Apr. 30, 2013
USD ($)
Related Party Transaction  
Period of indemnification for certain environmental and toxic tort liabilities 3 years
Deductible for claims related to indemnified environmental and toxic tort liabilities $ 0.5
Aggregate cap on indemnification for certain environmental and toxic tort liabilities $ 5.0
Bodil Knutsen  
Related Party Transaction  
Period of related party guarantee of payment of hire rate 5 years
Windsor Knutsen  
Related Party Transaction  
Period of related party guarantee of payment of hire rate 5 years
v3.19.2
Related Party Transactions - Related Party Costs and Expenses (Details) - USD ($)
$ in Thousands
1 Months Ended 3 Months Ended 6 Months Ended
Apr. 30, 2013
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Related Party Transaction          
Total income (expenses)   $ 2,296 $ 2,083 $ 4,617 $ 3,512
KNOT Management          
Related Party Transaction          
Administration fee   314 449 648 812
KOAS          
Related Party Transaction          
Administration fee   174 148 $ 345 290
Margin rate on administration cost       5.00%  
KOAS UK          
Related Party Transaction          
Administration fee   30 30 $ 60 60
Margin rate on administration cost       5.00%  
KNOT          
Related Party Transaction          
Other income     94   749
Operating expenses   1,736 1,509 $ 3,479 3,019
Administration fee   $ 42 $ 41 $ 85 $ 80
KNOT | Bodil Knutsen          
Related Party Transaction          
Period of related party guarantee of payment of hire rate 5 years        
KNOT | Windsor Knutsen          
Related Party Transaction          
Period of related party guarantee of payment of hire rate 5 years        
v3.19.2
Related Party Transactions - Schedule of Dues Payables to Related Party (Detail)
$ in Thousands
Dec. 31, 2018
USD ($)
Related Party Transaction  
Drydocking supervision fee $ 211
KNOT  
Related Party Transaction  
Drydocking supervision fee 187
KOAS  
Related Party Transaction  
Drydocking supervision fee $ 24
v3.19.2
Related Party Transactions - Amounts Due from (to) Related Parties (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Related Party Transaction    
Amount due from related parties $ 1,504 $ 1,141
Amount due to related parties 1,189 1,070
KOAS    
Related Party Transaction    
Amount due from related parties 578 466
Amount due to related parties 688 629
KNOT and affiliates    
Related Party Transaction    
Amount due from related parties 926 675
Amount due to related parties $ 501 $ 441
v3.19.2
Related Party Transactions - Trade Accounts Payable (Details) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Related Party Transaction    
Trade accounts payable to related parties $ 934 $ 792
KOAS    
Related Party Transaction    
Trade accounts payable to related parties 552 381
KNOT and affiliates    
Related Party Transaction    
Trade accounts payable to related parties $ 382 $ 411
v3.19.2
Related Party Transactions - Acquisitions from KNOT (Details)
Mar. 01, 2018
Acquisitions from KNOT | Anna Knutsen  
Related Party Transaction  
Percentage of interest acquired 100.00%
v3.19.2
Commitments and Contingencies - Assets Pledged, Claims and Legal Proceedings (Details) - USD ($)
$ in Millions
Jun. 30, 2019
Dec. 31, 2018
Commitments and Contingencies    
Book value of assets pledged as security for long-term debt and interest rate swap obligations $ 1,722 $ 1,767
v3.19.2
Commitments and Contingencies - Insurance (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2017
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2017
Insurance Proceeds            
Insurance coverage deductible amount per vessel $ 150     $ 150    
Deductible period under business interruption insurance       14 days    
Period of coverage under business interruption insurance       180 days    
Limit of protection and indemnity insurance for pollution, per vessel per incident 1,000,000     $ 1,000,000    
Loss of hire insurance payments recorded as a component of total revenues   $ 450     $ 450  
Net vessel operating expense 15,301 13,974   29,757 27,221  
Carmen Knutsen            
Insurance Proceeds            
Special survey drydocking period     5 years      
Deductible period under business interruption insurance     14 days      
Carmen Knutsen | Technical Default in Controllable Pitch Propeller            
Insurance Proceeds            
Loss of hire insurance payments recorded as a component of total revenues $ 450 $ 450   450 450  
Recoveries for repairs       2,250 2,250  
Cost of repairs       150 150 $ 2,400
Net vessel operating expense       $ 300 $ 300  
v3.19.2
Earnings per Unit and Cash Distributions - Calculations of Basic and Diluted Earnings per Unit (Details) - USD ($)
$ / shares in Units, shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Earnings per Unit and Cash Distributions        
Net income $ 8,176 $ 21,681 $ 21,045 $ 52,405
Less: Series A Preferred unitholders' interest in net income 1,800 1,800 3,600 3,600
Net income attributable to the unitholders of KNOT Offshore Partners LP 6,376 19,881 17,445 48,805
Less: Distributions 18,034 18,034 36,068 36,068
Under (over) distributed earnings $ (11,658) $ 1,847 $ (18,623) $ 12,737
Weighted average units outstanding (basic):        
General Partner 615 615 615 615
Weighted average units outstanding (diluted):        
General Partner 615 615 615 615
Earnings per unit (basic):        
General Partner $ 0.191 $ 0.597 $ 0.524 $ 1.465
Earnings per unit (diluted):        
General Partner 0.191 0.597 0.524 1.465
Cash distributions declared and paid in the period per unit 0.520 0.520 1.040 1.040
Subsequent event: Cash distributions declared and paid per unit relating to the period $ 0.520 $ 0.520 $ 1.040 $ 1.040
Common Units        
Earnings per Unit and Cash Distributions        
Net income attributable to the unitholders of KNOT Offshore Partners LP $ 6,258 $ 19,514 $ 17,123 $ 47,904
Weighted average units outstanding (basic):        
Weighted average units outstanding, basic 32,694 32,694 32,694 32,694
Weighted average units outstanding (diluted):        
Weighted average units outstanding, diluted 32,694 36,355 32,694 36,360
Earnings per unit (basic):        
Earnings per unit (basic) $ 0.191 $ 0.597 $ 0.524 $ 1.465
Earnings per unit (diluted):        
Earnings per unit (diluted) $ 0.191 $ 0.585 $ 0.524 $ 1.415
Limited Partner | Common Units        
Earnings per Unit and Cash Distributions        
Under (over) distributed earnings $ (11,442) $ 1,813 $ (18,279) $ 12,502
General Partner Unit        
Earnings per Unit and Cash Distributions        
Net income attributable to the unitholders of KNOT Offshore Partners LP 118 367 322 901
Under (over) distributed earnings (215) 34 (344) 235
IDR Holders        
Earnings per Unit and Cash Distributions        
Net income 700 700 1,400 1,400
Less: Distributions $ 700 $ 700 $ 1,400 $ 1,400
v3.19.2
Earnings per Unit and Cash Distributions - Additional Information (Details) - shares
3 Months Ended 6 Months Ended
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2019
Series A Preferred Stock          
Distribution Made to Limited Partner          
Potentially dilutive preferred units         3,750,000
IDR Holders | Maximum          
Distribution Made to Limited Partner          
Required percentage of operating surplus distribution 48.00% 48.00% 48.00% 48.00%  
Common Units | Public          
Distribution Made to Limited Partner          
Number of common units and subordinated units outstanding 24,036,226       24,036,226
Common Units | KNOT          
Distribution Made to Limited Partner          
Number of common units and subordinated units outstanding 8,567,500       8,567,500
Public | Partnership          
Distribution Made to Limited Partner          
Percentage of limited partner interest         73.50%
KNOT | Partnership          
Distribution Made to Limited Partner          
Percentage of limited partner interest         26.20%
KNOT | KNOT          
Distribution Made to Limited Partner          
Number of general partner units outstanding 615,117       615,117
KNOT | Common Units | KNOT          
Distribution Made to Limited Partner          
Number of common units and subordinated units outstanding 90,368       90,368
KNOT | Partnership          
Distribution Made to Limited Partner          
Percentage of limited partner interest         0.30%
Percentage of general partner interest         1.85%
v3.19.2
Acquisitions - Anna Knutsen (Details) - Anna Knutsen
$ in Thousands
Mar. 01, 2018
USD ($)
Vessels and Equipment  
Purchase consideration $ 19,913
Purchase consideration  
Cash consideration paid to KNOT 14,637
Purchase price adjustments 5,276
Purchase price 19,913
Additional information  
Purchase price adjustments $ 5,276
Acquisitions from KNOT  
Additional information  
Percentage of interest acquired 100.00%
Fair value, nonrecurring measurement for asset acquisition  
Vessels and Equipment  
Purchase consideration $ 19,913
Less: Fair value of net assets acquired:  
Vessels and equipment 120,274
Cash 4,537
Inventories 257
Derivative assets 1,839
Other current assets 111
Amounts due from related parties 520
Long-term debt (84,217)
Long-term debt from related parties (22,535)
Deferred debt issuance costs 1,228
Trade accounts payable (971)
Accrued expenses (1,013)
Amounts due to related parties (117)
Subtotal 19,913
Allocation to drydocking 2,329
Purchase consideration  
Purchase price adjustments 5,300
Purchase price 19,913
Additional information  
Vessel and equipment in purchase price 120,274
Outstanding indebtedness 106,800
Certain capitalized financing fees 1,400
Purchase price adjustments $ 5,300
v3.19.2
Subsequent Events (Details) - Subsequent Event
$ / shares in Units, $ in Millions
Aug. 14, 2019
USD ($)
$ / shares
Subsequent Events  
Cash distributions paid in the period per unit | $ / shares $ 0.52
Series A Preferred Unit  
Subsequent Events  
Cash distributions | $ $ 1.8
Cash distribution paid date Aug. 14, 2019