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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, 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

Table of Contents

KNOT OFFSHORE PARTNERS LP

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

Table of Contents

 

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.

2

Table of Contents

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.

3

Table of Contents

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.

4

Table of Contents

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.

(c) Recent Accounting Pronouncements

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