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, 2020

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 ☒ Form 40-F ☐

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 ☐ No ☒

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 ☐ No ☒

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KNOT OFFSHORE PARTNERS LP

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

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	Page

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019	3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019	4

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	5

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital for the Three and Six Months Ended June 30, 2020 and 2019	6

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	7

Notes to Unaudited Condensed Consolidated Financial Statements	8

Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Risk Factors	44

Forward-Looking Statements	46

Exhibits	49

Signature	50

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.

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Unaudited Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2020 and 2019

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Operating revenues: (Notes 3, 4 and 12)
Time charter and bareboat revenues	$	70,250	$	70,908	$	137,476	$	141,456
Other income		9		14		607		15
Total revenues		70,259		70,922		138,083		141,471
Operating expenses: (Note 12)
Vessel operating expenses		13,112		15,301		28,746		29,757
Depreciation (Note 9)		22,451		22,429		44,824		44,860
General and administrative expenses		1,337		1,264		2,724		2,561
Total operating expenses		36,900		38,994		76,294		77,178
Operating income		33,359		31,928		61,789		64,293
Finance income (expense):
Interest income		3		233		121		471
Interest expense (Note 5)		(8,512)		(13,186)		(18,974)		(26,844)
Other finance expense (Note 5)		(199)		(286)		(307)		(404)
Realized and unrealized gain (loss) on derivative instruments (Note 6)		(3,092)		(10,318)		(26,782)		(16,247)
Net gain (loss) on foreign currency transactions		127		(192)		(297)		(218)
Total finance expense		(11,673)		(23,749)		(46,239)		(43,242)
Income before income taxes		21,686		8,179		15,550		21,051
Income tax expense (Note 8)		(3)		(3)		(6)		(6)
Net income	$	21,683	$	8,176	$	15,544	$	21,045
Series A Preferred unitholders’ interest in net income	$	1,800	$	1,800	$	3,600	$	3,600
General Partner’s interest in net income		368		118		221		322
Limited Partners’ interest in net income		19,515		6,258		11,723		17,123
Earnings per unit (Basic): (Note 14)
Common unit (basic)	$	0.597	$	0.191	$	0.359	$	0.524
General Partner unit (basic)	$	0.597	$	0.191	$	0.359	$	0.524
Earnings per unit (Diluted): (Note 14)
Common unit (diluted)	$	0.582	$	0.191	$	0.359	$	0.524
General Partner unit (diluted)	$	0.597	$	0.191	$	0.359	$	0.524

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

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Unaudited Condensed Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2020 and 2019

(U.S. Dollars in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Net income	$	21,683	$	8,176	$	15,544	$	21,045
Other comprehensive income, net of tax		—		—		—		—
Comprehensive income	$	21,683	$	8,176	$	15,544	$	21,045

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

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Unaudited Condensed Consolidated Balance Sheets

As of June 30, 2020, and December 31, 2019

(U.S. Dollars in thousands)


	At June 30, 2020		At December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents (Note 7)	$	41,436	$	43,525
Amounts due from related parties (Note 12)		1,728		2,687
Inventories		2,242		2,292
Derivative assets (Notes 6 and 7)		39		920
Other current assets		4,072		3,386
Total current assets		49,517		52,810

Long-term assets:
Vessels, net of accumulated depreciation (Note 9)		1,635,546		1,677,488
Right-of-use assets (Note 4)		1,516		1,799
Intangible assets, net (Note 10)		983		1,286
Derivative assets (Notes 6 and 7)		—		648
Accrued income		3,424		3,976
Total long term assets		1,641,469		1,685,197
Total assets	$	1,690,986	$	1,738,007

LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable (Note 12)	$	2,496	$	2,730
Accrued expenses (Note 15)		4,755		6,617
Current portion of long-term debt (Notes 7 and 11)		83,523		83,453
Current lease liabilities (Note 4)		585		572
Current portion of derivative liabilities (Notes 6 and 7)		7,211		910
Income taxes payable		18		98
Current portion of contract liabilities		1,518		1,518
Prepaid charter		3,776		6,892
Amount due to related parties (Note 12)		1,250		1,212
Total current liabilities		105,132		104,002

Long-term liabilities:
Long-term debt (Notes 7 and 11)		870,150		911,943
Lease liabilities (Note 4)		931		1,227
Derivative liabilities (Notes 6 and 7)		23,987		5,133
Contract liabilities		2,927		3,685
Deferred tax liabilities (Note 8)		323		357
Total long-term liabilities		898,318		922,345
Total liabilities		1,003,450		1,026,347
Commitments and contingencies (Note 13)
Series A Convertible Preferred Units		89,264		89,264
Equity:
Partners’ capital:
Common unitholders		587,562		611,241
General partner interest		10,710		11,155
Total partners’ capital		598,272		622,396
Total liabilities and equity	$	1,690,986	$	1,738,007

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

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Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital

for the Three and Six Months Ended June 30, 2020 and 2019

(U.S. Dollars in thousands)


	Partners’ Capital				Accumulated				Serie A
			General		Other		Total		Convertible
	Common		Partner		Comprehensive		Partners’		Preferred
(U.S. Dollars in thousands)	Units		Units		Income (Loss)		Capital		Units
Three Months Ended June 30, 2019 and 2020
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

Consolidated balance at March 31, 2020	$	585,748	$	10,675	$	—	$	596,423	$	89,264
Net income		19,515		368		—		19,883		1,800
Other comprehensive income		—		—		—		—		—
Cash distributions		(17,701)		(333)		—		(18,034)		(1,800)
Consolidated balance at June 30, 2020		587,562		10,710		—		598,272		89,264

Six Months Ended June 30, 2019 and 2020
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

Consolidated balance at December 31, 2019	$	611,241	$	11,155	$	—	$	622,396	$	89,264
Net income		11,723		221		—		11,944		3,600
Other comprehensive income		—		—		—		—		—
Cash distributions		(35,402)		(666)		—		(36,068)		(3,600)
Consolidated balance at June 30, 2020	$	587,562	$	10,710	$	—	$	598,272	$	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, 2020 and 2019

(U.S. Dollars in thousands)


	Six Months Ended June 30,
(U.S. Dollars in thousands)	2020		2019
OPERATING ACTIVITIES
Net income	$	15,544	$	21,045
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		44,824		44,860
Amortization of contract intangibles / liabilities		(456)		(456)
Amortization of deferred debt issuance cost		1,262		1,314
Drydocking expenditure		(2,666)		69
Income tax expense		6		6
Income taxes paid		(78)		(121)
Unrealized (gain) loss on derivative instruments		26,685		17,047
Unrealized (gain) loss on foreign currency transactions		(56)		30
Changes in operating assets and liabilities:
Decrease (increase) in amounts due from related parties		959		(363)
Decrease (increase) in inventories		50		4
Decrease (increase) in other current assets		(699)		(71)
Decrease (increase) in accrued revenue		551		(567)
Increase (decrease) in trade accounts payable		(198)		(1,843)
Increase (decrease) in accrued expenses		(1,861)		(173)
Increase (decrease) prepaid charter		(3,116)		1,121
Increase (decrease) in amounts due to related parties		38		119
Net cash provided by operating activities		80,789		82,021

INVESTING ACTIVITIES
Disposals (additions) to vessel and equipment		(216)		—
Net cash used in investing activities		(216)		—

FINANCING ACTIVITIES
Repayment of long-term debt		(42,973)		(41,661)
Payment of debt issuance cost		(13)		21
Cash distribution		(39,668)		(39,668)
Net cash used in financing activities		(82,654)		(81,308)
Effect of exchange rate changes on cash		(8)		4
Net increase (decrease) in cash and cash equivalents		(2,089)		717
Cash and cash equivalents at the beginning of the period		43,525		41,712
Cash and cash equivalents at the end of the period	$	41,436	$	42,429

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 “Board”) 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 Board. 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 Board 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.

As of June 30, 2020, 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 2020 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 27, 2020, 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.

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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, 2019, which are included in the Partnership’s Annual Report on Form 20-F (the “2019 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, 2019, as contained in the Partnership’s 2019 20-F.

Adoption of new accounting standards

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (or ASU 2016- 13). ASU 2016-13 replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The new guidance is applicable to financial assets measured at amortized cost, including trade receivables, contract assets and net investment in financing leases and was effective for the Partnership from January 1, 2020, with a modified-retrospective approach. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements.

Accounting pronouncements not yet adopted

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides temporary optional expedients and exceptions to the guidance in US GAAP on contract modifications and hedge accounting, to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. For all types of hedging relationships, the guidance allows an entity to change the reference rate and other critical terms related to reference rate reform without having to dedesignate the relationship. The guidance is effective upon issuance through December 31, 2022. Although the Partnership does not apply hedge accounting, the Partnership has debt and interest rate swaps that reference LIBOR. The Partnership is evaluating the impact of the guidance on the consolidated financial statements.

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

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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, 2020 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, 2020 and 2019. 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)	2020				2019				2020				2019
Eni Trading and Shipping S.p.A.	$	10,953	16	%	$	11,134	16	%	$	22,088	16	%	$	22,146	16	%
Fronape International Company, a subsidiary of Petrobras Transporte S.A.		11,249	16	%		11,249	16	%		22,498	16	%		22,378	16	%
Repsol Sinopec Brasil, S.A., a subsidiary of Repsol Sinopec Brasil, B.V.		9,285	13	%		9,282	13	%		15,178	11	%		18,463	13	%
Brazil Shipping I Limited, a subsidiary of Royal Dutch Shell		20,512	29	%		20,606	29	%		41,236	30	%		40,889	29	%
Galp Sinopec Brasil Services B.V.		8,881	13	%		8,881	13	%		17,763	13	%		17,584	12	%

The Partnership has financial assets that expose it to credit risk arising from possible default by a counterparty. The Partnership considers its counterparties to be creditworthy banking and financial institutions and does not expect any significant loss to result from non-performance by such counterparties. The maximum loss due to credit risk that the Partnership would incur if counterparties failed completely to perform would be the carrying value of cash and cash equivalents, and derivative assets. The Partnership, in the normal course of business, does not demand collateral from its counterparties.

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 bareboat element of the contract, and non-lease component, consisting of operation of the vessel for the customers, which includes providing the crewing and other services related to the Vessel's operations, the cost of which is included in the daily hire rate, except when off hire.

The following table presents the Partnership's revenues by time charter and bareboat charters and other revenues for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended June 30,				Six Months Ended June 30,
(U.S. Dollars in thousands)	2020		2019		2020		2019
Time charter revenues (service element included)	$	59,001	$	59,659	$	114,978	$	119,078
Bareboat revenues		11,249		11,249		22,498		22,378
Other revenues		9		14		607		15
Total revenues	$	70,259	$	70,922	$	138,083	$	141,471

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As of June 30, 2020, the minimum contractual future revenues to be received from time charters and bareboat charters during the next five years and thereafter are as follows (service element of the time charter included):


(U.S. Dollars in thousands)
2020 (excluding the six months ended June 30, 2020)	$	136,220
2021		248,418
2022		167,739
2023		63,918
2024		20,093
2025		8,581
Total	$	644,969

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, 2020 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 2021 with Equinor Shipping Inc., a subsidiary of Equinor ASA, 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 Shell, with options to extend until 2023. In March 2019, the time charter contract was suspended until April 2020. During the suspension period, the Windsor Knutsen operated under a time charter contract with Knutsen Shuttle Tankers Pool AS on the same terms as the existing contract with Shell. Shell did not notify the Partnership by the due date of its intention to exercise its option to extend the time charter for the vessel. The charter will therefore expire in or around October 2020, the precise date to be fixed in accordance with the redelivery window as specified in the charter.

●

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 2022 with ENI, with options to extend until November 2024;

●

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

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●

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 April 2022 with a subsidiary of Shell, with options to extend until April 2032;

●

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

●

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

●

the Anna Knutsen, a shuttle tanker built in 2017 that is currently operating under a time charter that expires in March 2022 with Galp, with options to extend until March 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. As of June 30, 2020, the right-of-use asset and lease liability for operating leases was $1.5 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, 2020 was $0.2 million and $0.3 million respectively. As of June 30, 2020, 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, 2020, the weighted average remaining lease terms are 2.5 years.

A maturity analysis of the Partnership’s lease liabilities from leased-in equipment as of June 30, 2020 is as follows:


(U.S. Dollars in thousands)
2020 (excluding the six months ended June 30, 2020)	$	322
2021		644
2022		644
Total	$	1,610
Less imputed interest		94
Carrying value of operating lease liabilities	$	1,516

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5) Other Finance Expenses

(a) Interest Expense

The following table presents the components of interest cost as reported in the consolidated statements of operations for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(U.S. Dollars in thousands)	2020		2019		2020		2019
Interest expense	$	7,886	$	12,529	$	17,712	$	25,530
Amortization of debt issuance cost and fair value of debt assumed		626		657		1,262		1,314
Total interest cost	$	8,512	$	13,186	$	18,974	$	26,844

(b) Other Finance Expense

The following table presents the components of other finance expense for three and six months ended June 30, 2020 and 2019:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(U.S. Dollars in thousands)	2020		2019		2020		2019
Bank fees, charges	$	137	$	224	$	184	$	281
Commitment fees		62		62		123		123
Total other finance expense	$	199	$	286	$	307	$	404

6) 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 the U.S. Dollar 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.

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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, 2020 and December 31, 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 were $627.1 million and $561.8 million, respectively. As of June 30, 2020 and December 31, 2019, the carrying amount of the interest rate swaps contracts was a net liability of $31.2 million and $4.7 million, respectively. See Note 7—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 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, 2020 and December 31, 2019, 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 nil million and NOK 46.1 million, respectively. As of June 30, 2020 and December 31, 2019, the carrying amount of the Partnership’s foreign exchange forward contracts was a net liability of $nil million and net asset of $0.2 million, respectively. See Note 7—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, 2020 and 2019:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(U.S. Dollars in thousands)	2020		2019		2020		2019
Realized gain (loss):
Interest rate swap contracts	$	(191)	$	1,168	$	12	$	2,246
Foreign exchange forward contracts		(109)		(658)		(109)		(1,446)
Total realized gain (loss):		(300)		510		(97)		800
Unrealized gain (loss):
Interest rate swap contracts		(3,457)		(11,521)		(26,438)		(18,619)
Foreign exchange forward contracts		665		693		(247)		1,572
Total unrealized gain (loss):		(2,792)		(10,828)		(26,685)		(17,047)
Total realized and unrealized gain (loss) on derivative instruments:	$	(3,092)	$	(10,318)	$	(26,782)	$	(16,247)

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7) 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, 2020 and December 31, 2019. 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, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
(U.S. Dollars in thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	41,436	$	41,436	$	43,525	$	43,525
Current derivative assets:
Interest rate swap contracts		39		39		674		674
Foreign exchange forward contracts		—		—		246		246
Non-current derivative assets:
Interest rate swap contracts		—		—		648		648
Financial liabilities:
Current derivative liabilities:
Interest rate swap contracts		7,211		7,211		910		910
Non-current derivative liabilities:
Interest rate swap contracts		23,987		23,987		5,133		5,133
Long-term debt, current and non-current		959,842		959,842		1,002,813		1,002,813

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 $6.2 million and $7.4 million as of June 30, 2020 and December 31, 2019 , 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, 2020 and December 31, 2019 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, 2020 and December 31, 2019 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.

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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 3.6 years and 4.0 years, as of June 30, 2020 and December 31, 2019 , respectively), (2) the notional amount of the swap contract (ranging from $7.7 million to $50.0 million as of June 30,2020 and ranging from $8.5 million to $50.0 million as of December 31, 2019), discount rates interpolated based on relevant LIBOR swap curves; and (3) the rate on the fixed leg of the swap contract (rates ranging from 0.71% to 2.90% as of June 30, 2020 and from 1.38% to 2.90% as of December 31, 2019).

●

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, 2020 and December 31, 2019:

Fair Value Measurements