| Fair Value Measurements |
8)Fair Value Measurements (a)Fair Value of Assets and Liabilities The following table presents the carrying amounts and estimated fair values of the Partnership’s assets and liabilities that are measured at fair value on a recurring and non-recurring basis as of June 30, 2025 and December 31, 2024. 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, 2025 | | December 31, 2024 | | | | Carrying | | Fair | | Carrying | | Fair | | (U.S. Dollars in thousands) | | Amount | | Value | | Amount | | Value | | Recurring: | | | | | | | | | | | | | | Financial assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 66,322 | | $ | 66,322 | | $ | 66,933 | | $ | 66,933 | | Current derivative assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | 5,084 | | | 5,084 | | | 8,112 | | | 8,112 | | Non-current derivative assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | 2,401 | | | 2,401 | | | 5,189 | | | 5,189 | | Financial liabilities: | | | | | | | | | | | | | | Non-current derivative liabilities: | | | | | | | | | | | | | | Interest rate swap contracts | | | (1,317) | | | (1,317) | | | — | | | — | | Long-term debt, current and non-current | | $ | 918,585 | | $ | 901,003 | | $ | 909,653 | | $ | 887,192 | |
The carrying amounts shown in the table above are included in the unaudited interim consolidated balance sheet under the indicated captions. Carrying amount of long-term debt, current and non-current, above excludes capitalized debt issuance cost of $4.1 million and $4.9 million as of June 30, 2025 and December 31, 2024, 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 table above as of June 30, 2025 and December 31, 2024 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 assets and liabilities: | ● | 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, 2025 and December 31, 2024 there is no restricted cash. |
| ● | 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 1.6 years and 1.0 years, as of June 30, 2025 and December 31, 2024, respectively), (2) the notional amount of the swap contract (ranging from $13.1 million to $50.0 million as of June 30, 2025 and ranging from $13.8 million to $27.9 million as of December 31, 2024), discount rates interpolated based on relevant SOFR swap curves; and (3) the rate on the fixed leg of the swap contract (rates ranging from 1.55% to 3.80% as of June 30, 2025 and from 0.71% to 2.90% as of December 31, 2024). |
| ● | 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 and non-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, 2025 and December 31, 2024: | | | | | | | | | | | | | | | | | | | 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) | | 2025 | | (Level 1) | | (Level 2) | | (Level 3) | | Recurring: | | | | | | | | | | | | | | Financial assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 66,322 | | $ | 66,322 | | $ | — | | $ | — | | Current derivative assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | 5,084 | | | — | | | 5,084 | | | — | | Non-current derivative assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | 2,401 | | | — | | | 2,401 | | | — | | Financial liabilities: | | | | | | | | | | | | | | Non-current derivative liabilities: | | | | | | | | | | | | | | Interest rate swap contracts | | | (1,317) | | | — | | | (1,317) | | | — | | Long-term debt, current and non-current | | $ | 918,585 | | $ | — | | $ | 901,003 | | $ | — | |
| | | | | | | | | | | | | | | | | | | 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) | | 2024 | | (Level 1) | | (Level 2) | | (Level 3) | | Recurring: | | | | | | | | | | | | | | Financial assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 66,933 | | $ | 66,933 | | $ | — | | $ | — | | Current derivative assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | 8,112 | | | — | | | 8,112 | | | — | | Non-current derivative assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | 5,189 | | | — | | | 5,189 | | | — | | Financial liabilities: | | | | | | | | | | | | | | Long-term debt, current and non-current | | $ | 909,653 | | $ | — | | $ | 887,192 | | $ | — | |
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 and Level 2 as of June 30, 2025 and December 31, 2024.
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