Document:

EX-10.3

 Exhibit 10.3 

SHARE PURCHASE AGREEMENT 

Between 
 Knutsen NYK
Offshore Tankers AS 
 (as Seller) 

And 
 KNOT Shuttle
Tankers AS 
 (as Buyer) 
  

 
  

					
		  	for the sale and purchase of the shares in	  	
			
		  	Knutsen Shuttle Tankers 15 AS	  	

  
  

 

 SHARE PURCHASE AGREEMENT 

This agreement (this “Agreement”) is entered into the 23rd day of June, 2014
between: 
 (1) Knutsen NYK Offshore Tankers AS, company registration no. 995 221 713 

(the “Seller”), and 
 (2) KNOT Shuttle
Tankers AS, company registration no. 998 942 829 
 (the “Buyer”). 

The Seller and the Buyer are hereinafter individually referred to as a “Party” and jointly the “Parties”. 

 

	1	RECITALS 

 WHEREAS: 
  

	a)	Knutsen Shuttle Tankers 15 AS, company registration no. 997 006 968, is a private limited liability company that has as its purpose to engage in shipowning activities, is duly incorporated under Norwegian law
and has its registered place of business in Haugesund, Norway (the “Company”); 

  

	b)	The Seller is the sole owner of the ownership interest in the Company, with a share capital of NOK 200,000; 

  

	c)	The Company is the owner of the MT “Torill Knutsen”, having IMO No. 9630030 (the “Vessel”); and 

  

	d)	The Seller and the Buyer have agreed that the Buyer shall acquire 100% of the shares in the Company (the “Shares”) on the terms and conditions set forth in this Agreement. 

 

	2	DEFINITIONS 

 In this Agreement, the following definitions shall have the following meanings: 

 

					
	 a)
	  	Accounting Principles	  	means the applicable United States generally accepted accounting principles, applied on a consistent basis;
			
	 b)
	  	Accounts	  	means, in respect of the Company and Knutsen Shuttle Tankers 14 AS, its combined accounts, consisting of the income statement, balance sheet, statement of cash flow and the notes thereto, consolidated profit and loss account,
consolidated balance sheet and statement of cash flow and the notes thereto, for the financial years and quarters attached as Schedule 2;

  
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	 c)
	  	Accounts Date	  	means 31 March 2014;
			
	 d)
	  	Agreement	  	shall have the meaning ascribed to such term in the preamble to this Agreement;
			
	 e)
	  	Business	  	means the current business of the Company, being to own the Vessel, and charter the same under the Charter;
			
	 f)
	  	Business Day	  	means a day on which banks are open for general banking business in Norway;
			
	 g)
	  	Buyer	  	shall have the meaning ascribed to such term in the preamble to this Agreement;
			
	 h)
	  	Buyer Indemnitees	  	shall have the meaning ascribed to such term in Clause 12.1;
			
	 i)
	  	Charter	  	means the Time Charter Party, dated May 31, 2011, between the Company and the Charterer in relation to the Vessel;
			
	 j)
	  	Charterer	  	means Eni Trading and Shipping S.P.A.
			
	 k)
	  	Closing	  	shall have the meaning ascribed to such term in Clause 5.1;
			
	 l)
	  	Closing Date	  	means the date when the Closing actually takes place according to Clause 5.1;
			
	 m)
	  	Companies Act	  	means the Norwegian Limited Liability Companies Act of 1997
			
	 n)
	  	Company	  	means Knutsen Shuttle Tankers 15 AS;
			
	 o)
	  	Encumbrance	  	means any mortgage, charge, pledge, lien, option or other security interest or restriction of any kind;
			
	 p)
	  	Governmental Authority	  	means any domestic or foreign government, including federal, provincial, state, municipal, county or regional government or governmental or regulatory authority, domestic or foreign, and includes any department, commission,
bureau, board, administrative agency or regulatory body of any of the foregoing and any multinational or supranational organization.
			
	 q)
	  	Indemnified Party	  	shall have the meaning ascribed to such term in Clause 12.3;
			
	 r)
	  	Indemnifying Party	  	shall have the meaning ascribed to such term in Clause 12.3;
			
	 s)
	  	Losses	  	means any loss, liability, claim, damage, expense (including costs of investigation and defence and reasonable attorneys’ fees) or diminution of value, whether or not involving a third-party
claim;

  
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	 t)
	  	Material Adverse Effect	  	means a material adverse effect on the condition (financial, commercial, technical, legal or otherwise) of the Business, assets, results of operations or prospects of the Company;
			
	 u)
	  	Material Agreement	  	shall have the meaning ascribed to such term in Clause 8.11;
			
	 v)
	  	Omnibus Agreement	  	means the Omnibus Agreement, dated as of April 15, 2013, by and among the Seller, the Partnership, KNOT Offshore Partners GP LLC, KNOT Shuttle Tankers 17 AS and KNOT Shuttle Tankers 18 AS;
			
	 w)
	  	Party	  	shall have the meaning ascribed to such term in the preamble to this Agreement;
			
	 x)
	  	Parties	  	shall have the meaning ascribed to such term in the preamble to this Agreement;
			
	 y)
	  	Partnership	  	means KNOT Offshore Partners LP, a Marshall Islands limited partnership;
			
	 z)
	  	Purchase Price	  	shall have the meaning ascribed to such term in Clause 4;
			
	 aa)
	  	Purchase Price Adjustments	  	shall have the meaning ascribed to such term in Clause 5.4a);
			
	 bb)
	  	Seller	  	shall have the meaning ascribed to such term in the preamble to this Agreement;
			
	 cc)
	  	Seller Indemnitees	  	shall have the meaning ascribed to such term in Clause 12.2;
			
	 dd)
	  	Shares	  	shall have the meaning ascribed to such term in Clause 1;
			
	 ee)
	  	Signing Date	  	means the date of this Agreement;
			
	 ff)
	  	Swap Agreements	  	means the 2002 ISDA Master Agreement dated 3 February 2014, and entered into between the Company and DNB Bank ASA and the Schedule thereto and all Transactions and/or Confirmations (as each of the said expressions is defined in
the Master Agreement) supplemental thereto.
			
	 gg)
	  	Taxes	  	means all taxes (including value-added tax and similar taxes), however denominated, including interest, penalties and other additions to tax that may become payable or imposed by any applicable statute, rule or regulation or any
governmental agency, including all taxes, withholdings and other charges in respect of income, profits, gains, payroll, social security or other social benefit taxes, sales, use, excise, real or personal property, stamps, transfers and workers’
compensation, which the Company is required to pay, withhold or collect;

  
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	 hh)
	  	Third-Party Claim	  	shall have the meaning ascribed to such term in Clause 12.3;
			
	 ii)
	  	Torill Knutsen Facility	  	means the USD 117,000,000 pre- and post-delivery term loan facility agreement in respect of the Vessel dated November 3, 2011, made between (i) the Company as borrower, (ii) the Seller as parent guarantor, (iii) the banks and
financial institutions listed in Schedule 1 thereto as lenders, (iv) DnB Bank ASA, Nordea Bank Norge ASA, Skandinaviska Enskilda Banken AB (Publ) and Sparebanken Vest as mandated lead arrangers and bookrunners and (vi) Nordea Bank Norge ASA as
agent; and
			
	 jj)
	  	Vessel	  	shall have the meaning ascribed to such term in Clause 1.

  

	3	SALE AND PURCHASE 

 Subject to the terms and conditions set forth in this Agreement, the Seller agrees to
sell, and the Buyer agrees to purchase, the Shares, together with all rights attached to them. 
 The Shares shall be transferred to the Buyer on the
Closing Date, free and clear from any Encumbrances. 
  

	4	PURCHASE PRICE 

 The Seller agrees to sell and transfer to the Buyer, and the Buyer agrees to purchase
from the Seller for USD 169,000,000, less USD 112,125,000 of outstanding debt obligations under the Torill Knutsen Facility, and as adjusted for the balance under the Swap Agreements being USD 59,439 according to a mark-to-market
determination as of 17 June 2014 (the “Purchase Price”), plus the Purchase Price Adjustments, all in accordance with and subject to the terms and conditions set forth in this Agreement, the Shares. 

The Purchase Price is to be settled by way of a cash settlement in the amount of USD 56,934,439 on the Closing Date 

 

	5	CLOSING 

  

	5.1	Time and place 

 Subject to the satisfaction or waiver of the conditions set forth in Clause 6, the
completion of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of the Seller at such time and date as the Parties agree. 

 

	5.2	The Seller’s Closing obligations 

 At the Closing, the Seller shall: 

 

	a)	deliver to the Buyer a copy of the minutes of the meeting of the board of directors of the Seller authorising the execution of, and the consummation of the transaction completed by, this Agreement; and

  

	b)	in exchange for the payment of the Purchase Price, transfer the Shares to the Buyer and deliver to the Buyer the share register of the Company with the Buyer duly registered as the owner of the Shares, as well as the
related notices according to Sections 4-7 and 4-10 of the Companies Act. 

  
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	5.3	The Buyer’s Closing obligations 

 At the Closing, the Buyer shall settle the Purchase Price in
accordance with Clause 4. 
  

	5.4	Post-Closing Adjustment 

  

	a)	Within 60 days following the Closing Date, the Buyer and the Seller shall agree on the amount of the post-Closing adjustments to the Purchase Price based on the Company’s working capital as of 30 June 2014
(the “Purchase Price Adjustments”). 

  

	b)	Within 15 days following the date on which the Purchase Price Adjustments have been agreed pursuant to item a) above, the Buyer shall pay to the Seller an amount, in cash, equal to the Purchase Price Adjustments. Any
other elements than those covered by the Purchase Price Adjustments varying in the period between the Signing Date and the Closing Date shall be for Seller’s account. 

 

	6	CLOSING CONDITIONS 

  

	6.1	Conditions to the Buyer’s Closing obligations 

 The obligations of the Buyer to purchase the Shares
and to take the other actions required to be taken by it at the Closing are subject to the satisfaction of each of the following conditions (any of which may be waived in whole or in part by the Buyer) on or before the Closing Date: 

 

	a)	there is no material breach of any of the representations and warranties of the Seller set forth in Clause 8 and Clause 9; 

  

	b)	in all respects material to the transactions contemplated hereby, the Seller shall have performed or complied with all of its obligations pursuant to this Agreement to be performed or complied with by the Seller at or
prior to the Closing Date and shall have delivered each document or instrument to be delivered by it pursuant to this Agreement; 

  

	c)	the Buyer shall have obtained the funds necessary to consummate the purchase of the Shares and to pay all related fees and expenses; and 

 

	d)	the results of the searches, surveys, tests and inspection of the Vessel referred to in Clause 10.1(h) are reasonably satisfactory to Buyer. 

 

	6.2	Conditions to the Seller’s Closing obligations 

 The obligations of the Seller to sell the Shares
and to take the other actions required to be taken by it at the Closing are subject to the satisfaction of each of the following conditions (any of which may be waived in whole or in part by the Seller) on or before the Closing Date: 

 

	a)	there is no material breach of any of the representations and warranties of the Buyer set forth in Clause 7; 

  

	b)	each of the Partnership and the Buyer shall substitute and replace the Seller as guarantor under the Torill Knutsen Facility and the Swap Agreements, and the Seller will be released as guarantor thereunder; and

  

	c)	in all respects material to the transactions contemplated hereby, the Buyer shall have performed or complied with all of its obligations pursuant to this Agreement to be performed or complied with by the Buyer at or
prior to the Closing Date and shall have delivered each document or instrument to be delivered by it pursuant to this Agreement. 

  
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	6.3	Conditions of the Parties. 

 The obligations of Seller to sell the Shares and the obligations of
Buyer to purchase the Shares is subject to the satisfaction (or waiver by each of Seller and Buyer) on or prior to the Closing Date of the following conditions: 
  

	a)	The Seller shall have received any and all written consents, permits, approvals or authorizations of any Governmental Authority or any other Person (including, but not limited to, with respect to the Charter, the Torill
Knutsen Facility and the Swap Agreements) and shall have made any and all notices or declarations to or filing with any Governmental Authority or any other Person, including those related to any environmental laws or regulations, required in
connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereunder, including the transfer of the Shares; and 

 

	b)	No legal or regulatory action or proceeding shall be pending or threatened by any Governmental Authority to enjoin, restrict or prohibit the purchase and sale of the Shares. 

 

	7	REPRESENTATIONS AND WARRANTIES OF THE BUYER 

 The Buyer represents and warrants to the Seller that as of
the Signing Date and on the Closing Date, unless otherwise expressly stated: 
  

	7.1	Corporate existence and power 

 The Buyer is duly incorporated, validly existing and in good standing
under the laws of Norway. 
 The Buyer has not been declared insolvent; become the subject of a petition in bankruptcy; had a receiver appointed with
respect to it or to the Business or part thereof; entered into any arrangement with, or made an assignment for the benefit of, its creditors; or ceased to function as a going concern. 

 

	7.2	Corporate authorisation and non-contravention 

 This Agreement and each other document or instrument
delivered or to be delivered in connection with this Agreement has been duly authorised by all necessary corporate action(s) of the Buyer and constitutes or will, when executed, constitute valid and binding obligations of the Buyer enforceable in
accordance with its respective terms. 
 The execution by the Buyer of this Agreement and each other document or instrument delivered or to be delivered in
connection with it, and the performance by the Buyer of its obligations under this Agreement and the consummation of the transactions provided for in this Agreement, do not and will not result in a breach of any provision of the articles of
association of the Buyer or of any applicable law, order, judgment or decree of any court or any Governmental Authority or of any agreement to which the Buyer is bound. 

  
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 The Buyer is not required to obtain any authorisations, consents, approvals or exemptions by any Governmental
Authority in connection with the entering into or performance of its obligations under this Agreement. 
  

	8	REPRESENTATIONS AND WARRANTIES OF THE SELLER 

 The Seller represents and warrants to the Buyer as of the
Signing Date and on the Closing Date, unless otherwise expressly stated: 
  

	8.1	Corporate existence and power 

 Each of the Company and the Seller is duly incorporated, validly existing
and in good standing under the laws of Norway. 
 Each of the Company and the Seller has not been declared insolvent; become the subject of a petition in
bankruptcy; had a receiver appointed with respect to it or to the Business or part thereof; entered into any arrangement with, or made an assignment for the benefit of, its creditors; or ceased to function as a going concern. 

 

	8.2	Corporate authorisation and non-contravention 

 This Agreement and each other document or instrument
delivered or to be delivered in connection with this Agreement has been duly authorised by all necessary corporate action(s) of each of the Company and the Seller, as appropriate, and constitutes or will, when executed, constitute valid and binding
obligations of each of the Company and the Seller, as appropriate, enforceable in accordance with its respective terms. 
 The execution by each of the
Company and the Seller, as appropriate, of this Agreement and each other document or instrument delivered or to be delivered in connection with it, and the performance by each of the Company and the Seller, as appropriate, of its obligations under
this Agreement and the consummation of the transactions provided for in this Agreement, do not and will not result in a breach of any provision of the articles of association of each of the Company and the Seller, as appropriate, or of any
applicable law, order, judgment or decree of any court or any Governmental Authority or of any agreement to which each of the Company and the Seller, as appropriate, is bound. 

Each of the Company and the Seller, as appropriate, is not required to obtain any authorisations, consents, approvals or exemptions by any Governmental
Authority in connection with the entering into or performance of its obligations under this Agreement. 
  

	8.3	Capitalisation and title 

 The Seller has full ownership to the Shares. The Shares are fully authorised,
validly issued, fully paid and are, at the time of transfer pursuant to this Agreement, free and clear from any Encumbrances. 
 There is no outstanding
subscription, option or similar rights relating to the Shares. 
  

	8.4	Records 

 The Company’s articles of association and shareholders’ register are true, accurate,
up-to-date and complete. 

  
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	8.5	Charter documents; validity of the Charter 

 The Seller has supplied to the Buyer true and correct copies
of the Charter and any related documents, as amended to the Closing Date. The Charter is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms and, to the knowledge of the Seller, the Charter is a
valid and binding agreement of all other parties thereto enforceable against such parties in accordance with its terms. 
  

	8.6	Accounts 

 The Accounts have been prepared in accordance with the Accounting Principles and in accordance
with the books and records of the Company. The Accounts give a true and accurate view of the financial position, solvency, assets, liabilities, liquidity, cash flow and the result of the operations of the Company as of the Accounts Date. 

 

	8.7	No undisclosed liabilities 

 Neither the Company nor the Vessel has any Encumbrances, or other
liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, and whether due or to become due (including, without limitation, any liability for Taxes and interest, penalties and other charges payable with respect to
any such liability or obligation), except for such Encumbrances or other liabilities or obligations appearing in the ship registry of the Vessel and those arising under the Torill Knutsen Facility and the Swap Agreements. 

 

	8.8	Loans and other financial facilities 

 All loans and other financial facilities available to the Company
have been made available for review by the Buyer. As of the Signing Date, the principal outstanding amount under the Torill Knutsen Facility is USD 112,125,000. 

No event has occurred which gives, or after notice or lapse of time, or both, would give any third party the right to call for repayment from the Company
prior to normal maturity of any loan or other financial facility. The Company shall not be indebted, directly or indirectly, to any person who is an officer, director, stockholder or employee of any of the Seller or any spouse, child or other
relative or any affiliate of any such person, nor shall any such officer, director, stockholder, employee, relative or affiliate be indebted to the Company. 
  

	8.9	Assets 

 At the Closing Date, the Company shall not be using assets in the Business that it neither owns
nor has the right to use pursuant to written agreements with third parties. At the Closing Date, the assets of the Company will comprise all the assets necessary for carrying on the Business fully and effectively to the extent to which it is
conducted at the Signing Date. 
  

	8.10	Absence of certain changes or events 

 Since the Accounts Date, there has not occurred or arisen: 

 

	a)	any change of accounting methods, principles or practices, accounting, invoicing and supplier practice or procedures for the Company; 

 

	b)	any acquisition or disposal of, or the entering into any agreement to acquire or dispose of, any asset, other than the sale of products in the ordinary course of business; 

  
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	c)	the termination of any Material Agreement; 

  

	d)	any obligations, commitments or liabilities, contingent or otherwise, whether for Taxes or otherwise, except obligations, commitments and liabilities arising in the ordinary course of business; 

 

	e)	any event or condition, whether covered by insurance or not, which has resulted in or may result in a Material Adverse Effect; or 

  

	f)	the entering into of any agreements or commitments other than on customary terms. 

  

	8.11	Agreements 

 Each Material Agreement is in full force and effect. No other Material Agreements will be
entered into by the Company prior the Closing Date without the prior consent of the Buyer (such consent not to be unreasonably withheld). The Company has fulfilled all material obligations required pursuant to the Material Agreements to have been
performed by it prior to the Signing Date and has not waived any material rights thereunder. 
 There has not occurred any material default on the part of
the Company under any of the Material Agreements, or to the knowledge of the Seller, on the part of any other party thereto, nor has any event occurred that with the giving of notice or the lapse of time, or both, would constitute any material
default on the part of the Company under any of the Material Agreements nor, to the knowledge of the Seller, has any event occurred that with the giving of notice or the lapse of time, or both, would constitute any material default on the part of
any other party to any of the Material Agreements. 
 The term “Material Agreement” means each agreement, contract or other
undertaking by or of the Company (a) that is of material importance to the Business or (b) the value of which, in respect of total turnover during one year, is not less than USD 100,000, provided, however, that such term includes the
Charter, the Torill Knutsen Facility and the Swap Agreements. 
  

	8.12	Insurance 

 The Company maintains insurance policies on fire, theft, loss, disruption, product and
general liability and other forms of insurance with reputable insurers that would reasonably be judged to be sound and required for the Business. 
 The
Company’s insurance policies do not contain any provisions regarding a change of control or ownership of the insured. 
 The Company is in
compliance with all terms and conditions contained in the insurance policies, and nothing has been done or omitted to be done that would make any insurance policy or insurance void or voidable or that would result in a reduction of the coverage
(No: avkortning). 
  

	8.13	Environmental matters 

 The Company is not and has not been in breach of any applicable laws (whether
civil, criminal or administrative), statutes, regulations, directives, codes, judgments, orders or any other measures imposed by any governmental, statutory or regulatory body with regard to the pollution or the protection of the environment or to
the protection of human health or human safety, or any other living organisms supported by the environment. 

  
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 There is no current governmental investigation or disciplinary proceeding relating to any alleged breach of any
law or permit by the Company, and none is pending, nor threatened. 
 The Company has not, other than as permitted under applicable permits or applicable
laws or regulations held from time to time, disposed of, discharged, released, placed, dumped or emitted any hazardous substances, such as pollutants, contaminants, hazardous or toxic materials, wastes or chemicals. Neither the Seller nor the
Company has received any formal or informal notice or other communication from which it appears that the Company may be or has been in violation of any laws or permits. There are no actual or contingent obligations on the Company to pay money or
carry out any work in order to keep or be granted an extension or renewal of any existing permit. There are no facts or circumstances that could result in such an obligation. The properties used by the Company are not made of or do not contain any
form of asbestos or any other toxic substance that may cause damage to the health of the persons working or visiting the premises. 
  

	8.14	Compliance with laws 

 The Company has at all times conducted the Business in accordance with and has
complied with any applicable laws in Norway and in any other relevant countries relating to its operations and the Business. 
 All necessary licences,
consents, permits and authorisations have been obtained by the Company to enable the Company to carry on the Business in the places and in the manner in which such Business is now conducted and all such licences, consents, permits and authorisations
are valid and subsisting and have been complied with in all respects. 
  

	8.15	Litigation 

 There are no claims, actions, lawsuits, administrative, governmental, arbitration or other
legal proceedings (including but not limited to proceedings related to Taxes) pending or threatened against or involving the Company, the Business or properties or assets of the Company and which would result in a Material Adverse Effect if
adversely determined. 
  

	8.16	Taxes 

 The Company has properly filed with the appropriate Tax authorities all Tax returns and reports
required to be filed for all Tax periods ending prior to the Closing Date. Such filings are true, correct and complete. All information required for a correct assessment of Taxes has been provided. 

The Tax returns of the Company have been assessed and approved by the Tax authorities through the Tax years up to and including the years for which such
assessment and approval is required, and the Company is not subject to any dispute with any such authority. 
 All Taxes that have become due have been
fully paid or fully provided for in the Accounts, and the Company shall not be liable for any additional Tax pertaining to the period before the Accounts Date. All Taxes for the period after the Accounts Date have been fully paid when due. 

  
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 There are no Tax audits, Tax disputes or Tax litigation pending or threatened against or involving the Company.
There is no basis for assessment of any deficiency in any Taxes against the Company that has not been provided for in the Accounts or that has not been paid. 

The Company is not and has not been involved in any transaction that could be considered as Tax-evasive. All losses for Tax purposes incurred by of the
Company are trading losses and are available to be carried forward and set off against income in succeeding periods without limitation and have been accepted by the relevant Tax authorities. 

The Company is not and has not been subject to any Tax outside its respective country of fiscal residence. 

 

	8.17	Relationship with the Seller 

 Except as disclosed to the Buyer, there are no written or oral agreements
or arrangements between the Company and the Seller, and no liabilities or obligations (contingent or otherwise) owed by the Company to the Seller. 
 No
services provided by the Seller to the Company are necessary in the ordinary course of business. 
 No payments of any kind, including, but not limited to
management charges, have been made by the Company to the Seller, save for payments under agreements or arrangements made on an arm’s-length basis in accordance with applicable law and regulations. 

 

	8.18	Information 

 All documents provided to the Buyer by or on behalf of the Seller or the Company are true
and correct, and no document provided to the Buyer by or on behalf of the Seller or the Company contains any untrue statement of a relevant fact or omits to state a relevant fact necessary to make the statements contained in the document not
misleading. 
 There are no facts or circumstances known to the Seller, relating to the affairs of the Company, that have not been disclosed to the Buyer,
which, if disclosed, reasonably could have been expected to influence the decision of the Buyer to purchase the Shares on the terms of this Agreement. 

The Seller confirms that the Seller, prior to the Signing Date, has made, and until the Closing Date, shall continue to make, all investigations necessary in
order to ensure that the statements in Clause 7 are correct. 

  
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	9	REPRESENTATIONS AND WARRANTIES OF THE SELLER REGARDING THE VESSEL 

 The Seller represents and warrants to
the Buyer as of the Signing Date and on the Closing Date, unless otherwise expressly stated: 
  

	9.1	Flag and title 

 The Company is the registered owner of the Vessel and has good and marketable title to
the Vessel, free and clear of any and all Encumbrances, other than those arising under the Torill Knutsen Facility. The Vessel is properly registered in the name of the Seller under and pursuant to the flag and law of the United Kingdom, and all
fees due and payable in connection with such registration have been paid. 
  

	9.2	Classification 

 The Vessel is entered with Det Norske Veritas and has the highest classification rating.
The Vessel is in class without any recommendations or notation as to class or other requirement of the relevant classification society, and if the Vessel is in a port, it is in such condition that it cannot be detached by any port state authority or
the flag state authority for any deficiency. 
  

	9.3	Maintenance 

 The Vessel has been maintained in a proper and efficient manner in accordance with
internationally accepted standards for good ship maintenance, is in good operating order, condition and repair and is seaworthy, and all repairs made to the Vessel during the last two years and all known scheduled repairs due to be made and all
known deficiencies have been disclosed to the Buyer. 
  

	9.4	Liens 

 The Vessel is not (a) under arrest or otherwise detained, (b) other than in the
ordinary course of business, in the possession of any person (other than her master and crew) or (c) subject to a possessory lien. 
  

	9.5	Safety 

 The Vessel is supplied with valid and up-to-date safety, safety construction, safety equipment,
radio, loadline, health, tonnage, trading and other certificates or documents as may for the time being be prescribed by the laws of the United Kingdom or of any other pertinent jurisdiction, or that would otherwise be deemed necessary by a
shipowner acting in accordance with internationally accepted standards for good ship management and operations. 
  

	9.6	No blacklisting or boycotts 

 No blacklisting or boycotting of any type has been applied or currently
exists against or in respect of the Vessel. 
  

	9.7	No options 

 There are not outstanding any options or other rights to purchase the Vessel other than the
option held by the Buyer pursuant to the Omnibus Agreement. 
  

	9.8	Insurance 

 The insurance policies relating to the Vessel are as set forth on Schedule 1 hereto,
each of which is in full force and effect and, to the Seller’s knowledge, not subject to being voided or terminated for any reason. 
  

	10	COVENANTS PRIOR TO THE CLOSING 

  

	10.1	Covenants of the Seller Prior to the Closing 

 From the Signing Date to the Closing Date, the Seller
shall cause the Company to conduct its business in the usual, regular and ordinary course in substantially the same manner as previously 

  
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conducted. The Seller shall not permit the Company to enter into any contracts or other written or oral agreements prior to the Closing Date, other than such contracts and agreements as have been
disclosed to the Buyer prior to the Signing Date, without the prior consent of the Buyer (such consent not to be unreasonably withheld). In addition, the Seller shall not permit the Company to take any action that would result in any of the
conditions to the purchase and sale of the Shares set forth in Clause 6 not being satisfied. Furthermore, the Seller hereby agrees and covenants that it: 
  

	a)	shall use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary to consummate and make effective as promptly as possible the transactions contemplated by this
Agreement and to co-operate with the Buyer and others in connection with the foregoing; 

  

	b)	shall use its best efforts to obtain the authorisations, consents, orders and approvals of regulatory bodies and officials that may be or become necessary for the performance of its obligations pursuant to this
Agreement and the completion of the transactions contemplated by it; 

  

	c)	shall co-operate with the Buyer and promptly seek to obtain such authorisations, consents, orders and approvals as may be necessary for the performance of the Parties’ respective obligations pursuant to this
Agreement; 

  

	d)	shall not amend, alter or otherwise modify or permit any amendment, alteration or modification of any material provision of or terminate the Charter or any other contract prior to the Closing Date without the prior
written consent of the Buyer, such consent not to be unreasonably withheld or delayed; 

  

	e)	shall not exercise or permit any exercise of any rights or options contained in the Charter, without the prior written consent of the Buyer, not to be unreasonably withheld or delayed; 

 

	f)	shall observe and perform in a timely manner, all of its covenants and obligations under the Charter, the Torill Knutsen Facility and the Swap Agreements, if any, and in the case of a default by another party thereto,
it shall forthwith advise the Buyer of such default and shall, if requested by the Buyer, enforce all of its rights under such Charter, the Torill Knutsen Facility or the Swap Agreements, as applicable, in respect of such default; 

 

	g)	shall not cause or, to the extent reasonably within its control, permit any Encumbrances to attach to the Vessel other than in connection with the Torill Knutsen Facility and the Swap Agreements; and 

 

	h)	shall permit representatives of the Buyer to make, prior to the Closing Date, at the Buyer’s risk and expense, such surveys, tests and inspections of the Vessel as the Buyer may deem desirable, so long as such
surveys, tests or inspections do not damage the Vessel or interfere with the activities of the Seller, the Company or the Charterer thereon and so long as the Buyer shall have furnished the Seller with evidence that adequate liability insurance is
in full force and effect. 

  

	10.2	Covenants of the Buyer Prior to the Closing 

 The Buyer hereby agrees and covenants that during the
period of time after the Signing Date and prior to the Closing Date, the Buyer shall, in respect of the Shares to be transferred on the Closing 

  
 14 

 
Date, take, or cause to be taken, all necessary partnership action, steps and proceedings to approve or authorize validly and effectively the purchase and sale of the Shares and the execution and
delivery of this Agreement and the other agreements and documents contemplated hereby. 
  

	11	TERMINATION 

  

	11.1	Termination 

 This Agreement may be terminated, and the transactions contemplated by this Agreement may
be abandoned, at any time prior to the Closing Date: 
  

	a)	by either Party if a breach of any provision of this Agreement has been committed by the other Party, such breach has not been waived and such breach is material to the transactions contemplated hereby, the Business or
the assets, financial condition or prospect of the Company; 

  

	b)	by either Party if satisfaction of any of the conditions in Clause 6.3 is or becomes impossible and Buyer and Seller have not waived such condition; 

 

	c)	by the Buyer if satisfaction of any of the conditions in Clause 6.1 is or becomes impossible (other than through the failure of the Buyer to comply with its obligations under this Agreement) and the Buyer has not waived
such condition; 

  

	d)	by the Seller if satisfaction of any of the conditions in Clause 6.2 is or becomes impossible (other than through the failure of the Seller to comply with its obligations under this Agreement) and the Seller has not
waived such condition; 

  

	e)	by the Buyer due to a change having occurred that has resulted or may result in a Material Adverse Effect; or 

  

	f)	by mutual written consent of the Seller and the Buyer. 

  

	11.2	Rights on termination 

 If this Agreement is terminated pursuant to Clause 11.1, all further obligations
of the Parties pursuant to this Agreement shall terminate without further liability of a Party to the other, provided, however, that the obligations of the Parties contained in Clause 14 (Costs) and Clause 18 (Governing Law and arbitration) shall
survive such termination, and further provided, that if this Agreement is terminated by a Party because of the breach of this Agreement by the other Party or because one or more of the conditions to the terminating Party’s obligations under
this Agreement is not satisfied as a result of the other Party’s failure to comply with its obligations under this Agreement, the terminating Party’s right to pursue all legal remedies will survive such termination unimpaired. 

  
 15 

	12	INDEMNIFICATION 

  

	12.1	Indemnity by the Seller 

 Subject to Clause 13, following the Closing, the Seller shall be liable for,
and shall indemnify, defend and hold harmless the Buyer and its respective officers, directors, employees, agents and representatives (the “Buyer Indemnitees”) from and against, any Losses, suffered or incurred by such Buyer
Indemnitees: 
  

	a)	by reason of, arising out of or otherwise in respect of any inaccuracy in, breach of any representation or warranty, or a failure to perform or observe fully any covenant, agreement or obligation of, the Seller in or
under this Agreement or in or under any document, instrument or agreement delivered pursuant to this Agreement by the Seller; 

  

	b)	subject to Clause 14 (b), any fees, expenses or other payments incurred or owed by the Seller to any brokers, financial advisors or comparable other persons retained or employed by it in connection with the transaction
contemplated by this Agreement; or 

  

	c)	any Losses suffered or incurred by such Buyer Indemnitees in connection with any claim for the repayment of hire or Losses in relation to the Vessel for periods prior to the Closing. 

 

	12.2	Indemnity by the Buyer 

 Following the Closing, the Buyer shall be liable for, and shall
indemnify, defend and hold harmless the Seller and its respective officers, directors, employees, agents and representatives (the “Seller Indemnitees”) from and against, any Losses, suffered or incurred by such Seller Indemnitees by
reason of, arising out of or otherwise in respect of any inaccuracy in, breach of any representation or warranty, or a failure to perform or observe fully any covenant, agreement or obligation of, the Buyer in or under this Agreement or in or under
any document, instrument or agreement delivered pursuant to this Agreement by the Buyer. 
  

	12.3	Indemnification procedures with respect to third-party claims 

 If the Seller or the Buyer, as the
case may be (an “Indemnified Party”), shall receive notice of any claim by a third party that is or may be subject to indemnification or compensation from the other Party pursuant to this Agreement (a “Third-Party
Claim”), the Indemnified Party shall give the other Party (the “Indemnifying Party”) prompt written notice of such Third-Party Claim and the Indemnifying Party shall, at the Indemnifying Party’s option, have the right
to participate in the defence thereof by counsel at the Indemnifying Party’s own cost and expense. If the Indemnifying Party acknowledges within 30 days from such written notice in writing its obligation to indemnify the Indemnified Party
against all Losses that may result from such Third-Party Claim, the Indemnifying Party shall be entitled, at the Indemnifying Party’s option, to assume and control the defence of such Third-Party Claim at the Indemnifying Party’s cost and
expense and through counsel of the Indemnifying Party’s choice. No such Third-Party Claim may be settled by the Indemnifying Party without the written consent of the Indemnified Party, unless the settlement involves only the payment of money by
the Indemnifying Party. No Third-Party Claim that is being defended in good faith by the Indemnifying Party shall be settled by the Indemnified Party without the written consent of the Indemnifying Party. The Indemnifying Party shall have no
obligation to indemnify the Indemnified Party for any losses resulting from the settlement of Third-Party Claims in violation of the provisions of this Clause 12.3. 

  
 16 

	13	OMNIBUS AGREEMENT INDEMNIFICATION 

 Notwithstanding any other provision of this Agreement, the Seller
shall be liable for, and shall indemnify, defend and hold harmless the Partnership and any person controlled by the Partnership, including the Buyer, from and against the matters set forth in Article XIII of the Omnibus Agreement, subject to
the terms and conditions set forth therein. 
 The Seller’s indemnification obligations under this Clause 13 shall only be subject to limitations
insofar as such limitations follow from Article XIII of the Omnibus Agreement. 
  

	14	COSTS 

  

	a)	Subject to Clause 14 (b), each party shall pay its own costs and expenses in connection with the preparation for and completion of the transactions contemplated by this Agreement, including but not limited to all fees
and expenses of its own representatives, agents, brokers, legal and financial advisers and authorities and no such costs or expenses shall be charged to or paid by, neither directly or indirectly, the Company. 

 

	b)	The fees and expenses of AMA Securities Inc. in providing its fairness opinion pursuant to Clause 9.2(b) of the Omnibus Agreement, will be divided equally between the Buyer and the Seller. 

 

	15	NOTICES 

 All notices, requests, demands, approvals, waivers and other communications required or
permitted under this Agreement must be in writing in the English language and shall be deemed to have been received by a Party when: 
  

	a)	delivered by post, unless actually received earlier, on the third Business Day after posting, if posted within Norway, or the fifth Business Day, if posted to or from a place outside Norway; 

 

	b)	delivered by hand, on the day of delivery; or 

  

	c)	delivered by fax, on the day of dispatch if supported by a written confirmation from the sender’s fax machine that the message has been properly transmitted. 

All such notices and communications shall be addressed as set forth below or to such other addresses as may be given by written notice in accordance with this
Clause 15. 
 If to the Seller: 
 Knutsen NYK Offshore Tankers
AS 
 Attention: Chairman of the Board 
 Smedasundet 40,
Postboks 2017, 5504 Haugesund, Norway 
 Fax no.: +47 52 70 40 40 

If to the Buyer: 
 KNOT Shuttle Tankers AS 

Attention: Chairman of the Board 
 Smedasundet 40, Postboks 2017,
5504 Haugesund, Norway 
 Fax no.: +47 52 70 40 40 

  
 17 

	16	ASSIGNMENT 

 This Agreement shall be binding upon and inure to the benefit of the successors of the
Parties, but shall not be assignable by any of the Parties without the prior written consent of the other Party. The benefit of this Agreement may, however, be assigned by either of the Parties to any group directly or indirectly controlling,
controlled by or under common control of the assignor, provided that the assignor shall remain liable for its own debt and for all obligations under this Agreement. 
  

	17	MISCELLANEOUS 

  

	17.1	Further Assurances 

 From time to time after the Signing Date, and without any further consideration, the
Parties agree to execute, acknowledge and deliver all such additional deeds, assignments, bills of sale, conveyances, instruments, notices, releases, acquittances and other documents, and shall do all such other acts and things, all in accordance
with applicable law, as may be necessary or appropriate (a) more fully to assure that the applicable Parties own all of the properties, rights, titles, interests, estates, remedies, powers and privileges granted by this Agreement, or which are
intended to be so granted, (b) more fully and effectively to vest in the applicable Parties and their respective successors and assigns beneficial and record title to the interests contributed and assigned by this Agreement or intended so to be
and (c) more fully and effectively to carry out the purposes and intent of this Agreement. 
  

	17.2	Integration 

 This Agreement, the Schedules and Appendices hereto and the instruments referenced herein
supersede all previous understandings or agreements among the Parties, whether oral or written, with respect to its subject matter hereof. This Agreement, the Schedules and Appendices hereto and the instruments referenced herein contain the entire
understanding of the Parties with respect to the subject matter hereof and thereof. No understanding, representation, promise or agreement, whether oral or written, is intended to be or shall be included in or form part of this Agreement unless it
is contained in a written amendment hereto executed by the Parties hereto after the Signing Date. 
  

	17.3	No Broker’s Fees 

 No one is entitled to receive any finder’s fee, brokerage or other
commission in connection with the purchase of the Shares or the consummation of the transactions contemplated by this Agreement. 
  

	18	GOVERNING LAW AND ARBITRATION 

 This Agreement shall be governed by and construed in accordance with
Norwegian law. 
 The Parties shall seek to solve through negotiations any dispute, controversy or claim arising out of or relating to this Agreement, or
the breach, termination or invalidity hereof. If the Parties fail to solve such dispute, controversy or claim by a written agreement within 60 days after one of the Parties has requested such negotiations by notice to the other Party, such dispute,
controversy or claim shall be finally settled by arbitration in Haugesund in the English language in accordance with the Norwegian Arbitration Act. The arbitration tribunal shall consist of three arbitrators, of which the Buyer shall appoint one
arbitrator and the Seller shall appoint one arbitrator. The arbitrators so appointed shall appoint the third arbitrator, who shall be the chairman of the arbitration tribunal. In the event of failure by a Party to appoint its arbitrator within 30
days after the request for arbitration first is given, or the failure by the first two arbitrators to appoint the third arbitrator 

  
 18 

 
within 30 days after appointment of the last of the first two arbitrators to be appointed, such arbitrator or arbitrators shall be appointed by the district judge (No:
“Sorenskriver”) of Haugesund District Court. Any Party may seek judgement upon any award in any court having jurisdiction, or an application may be made to such court for the judicial acceptance of the award and for an order of
enforcement. 
 Notwithstanding the above, either Party may bring an action in any court of competent jurisdiction (a) for provisional relief pending
the outcome of arbitration, including, without limitation, provisional injunctive relief or pre-judgement attachment of assets, or (b) to compel arbitration or enforce any arbitral award. For purposes of any proceeding authorised by this Clause
17, each Party hereby consents to the non-exclusive jurisdiction of Haugesund, Norway. 
 * * * 

  
 19 

 This Agreement has been executed in two original copies, of which each Party has retained one copy. 

 

									
	Knutsen NYK Offshore Tankers AS	 		 	KNOT Shuttle Tankers AS
					
	By:	 	 /S/ ØYSTEIN MOKSHEIM KALLEKLEV
	 		 	By:	 	 /S/ KARL GERHARD BRASTEIN
DAHL

					
	Name:	 	 Øystein Moksheim Kalleklev
	 		 	Name:	 	 Karl Gerhard Brastein Dahl

					
	Title:	 	 Chief Financial Officer
	 		 	Title:	 	 Senior Vice President Board Member

  
 20 

 INSURANCES 

Schedule 1 
 Insurance Policies (all
quoted values are USD) 
  
 Hull &
Machinery 
  

											
	 Hull
	  	Insured Value:	  	$	145 000 000	  	  	Policy Renewal:	  	04.11.2013
	 Hull Interest
	  	Insured Value:	  	$	36 250 000	  	  	Policy Renewal:	  	04.11.2013
	 Freight Interest
	  	Insured Value:	  	$	36 250 000	  	  	Policy Renewal:	  	04.11.2013

 Loss of Hire (14-day deductible, 180-day maximum single claim, 180-day maximum sum of all claims paid) 

													
					
	 Daily Amount: $ 63 500
	  	Insured Value:	  	$	    5 715 000	  	  	Policy Renewal:	  	 	04.11.2013	  

									
	
	P&I Insurance

											
					
	 Gross Tonnage: 80 850
	  		  		  	Policy Renewal:	  	 	20.02.2014	  

									
	
	War Risk

													
					
		  	Insured Value:	  	$	217 500 000	  	  	Policy Renewal:	  	 	01.01.2014	  

 Hull & Machinery 
  

					
	 	5	% 	 	 Security through Edge Insurance Brokers (Singapore) PTE. Ltd.

		
	 	5	% 	 	 India International Insurances, Singapore

	 	2,75	% 	 	 Security Through Edge Insurance Brokers (Singapore) Pte. Ltd.

	 	2,75	% 	 	 Asia Capital Re. Singapore

	 	2,25	% 	 	 Security through JLJ Maritime S.A

	 	2,25	% 	 	 Vienna Insurance Group AG

	  
	  
	 	 	
	 	10	% 	 	 Total

		
	 	12,5	% 	 	 Norwegian Hull Club-Gjensidige Assuranseforening, bergen

	 	12,5	% 	 	 Gard AS, as agent only for Gard M&E Ltd.

	 	2	% 	 	 Codan Forsikring NUF

	 	10	% 	 	 Aon London Broking Center

	 	10	% 	 	 Lloyds Syndicate 1209 XL

	 	5	% 	 	 Aon London Broking Center

	 	5	% 	 	 Arch Insurance Comp. (Europe) Ltd.

	 	2,5	% 	 	 International Insurance Company of Hannover Ltd.

	 	5	% 	 	 Skuld 1897

	 	3	% 	 	 Mitsui Sumitomo Insurance Co. Ltd.

	 	5	% 	 	 Chaucer Underwriting

	 	5	% 	 	 Lloyds Syndicate 1084 Chaucer

	 	2	% 	 	 Alandia Insurance Co. Ltd

	 	6,5	% 	 	 Tokio Marine & Nichido Fire Ins. Co. Ltd.

	 	2,5	% 	 	 The Swedish Club

	 	5	% 	 	 Aon Benfield Italia S.p.A

	 	5	% 	 	 S.I.A.T

	 	2,5	% 	 	 UNIQA Österreich Versicherungen AG

	 	2	% 	 	 Markel International Sweden

	 	9	% 	 	 Aon London Broking Center

	 	9	% 	 	 Swiss Re International SE, UK Branch

	 	3	% 	 	 Ingosstrakh Insurance Company Ltd.

	  
	  
	 	 	
	 	90	% 	 	 Total

		
	 	100	% 	 	 Total

  
 21 

 Hull Interest/Freight Interest 
  

					
	 	2,5	% 	 	 Alandia Insurance Co. Ltd

	 	10	% 	 	 Aon London Broking Center

	 	10	% 	 	 Lloyds Syndicate 1209 XL

	 	5	% 	 	 Aon London Broking Center

	 	5	% 	 	 Arch Insurance Comp. (Europe) Ltd.

	 	9	% 	 	 Aon London Broking Center

	 	9	% 	 	 Swiss Re International SE, UK Branch

	 	2	% 	 	 Chaucer Underwriting A/S

	 	2	% 	 	 Lloyds Syndicate 1084 Chaucer

	 	18	% 	 	 Codan Forsikring NUF

	 	19	% 	 	 Gard A, as agents only for Gard M&E Ltd.

	 	2,5	% 	 	 International Insurance Company of Hannover Ltd.

	 	20	% 	 	 Norwegian Hull Club

	 	3	% 	 	 Skuld 1897

	 	2,5	% 	 	 The Swedish Club

	 	6,5	% 	 	 Tokio Marine & Nichido Fire Ins. Co. Ltd.

	  
	  
	 	 	
	 	100	% 	 	 Total

 Loss of Hire 
  

					
	 	10	% 	 	 Codan Forsikring, Norw. Branch of Codan Fors. AS,DK

	 	10	% 	 	 Försäkringsaktiebolaget Alandia, Mariehamn

	 	25	% 	 	 Gard AS as Agent Only for Gard M.&e:, bergen

	 	10	% 	 	 Lloyds Syndicate NO 1897 Skuld

	 	10	% 	 	 Security Through Mar Risk Services Ltd.

	 	10	% 	 	 Lloyds Syndicate No. 1209 XL

	 	25	% 	 	 Norwegian Hull Club, Bergen (20134375)

	 	10	% 	 	 Tokio Marine & Nichido Fire Ins. Co. Ltd. Tokyo

	  
	  
	 	 	
	 	100	% 	 	 Total

 OR 
  

					
	 	10	% 	 	 Codan Forsikring, Norw. Branch of Codan Fors. AS,DK

	 	15	% 	 	 Försäkringsaktiebolaget Alandia, Mariehamn

	 	22	% 	 	 Gard AS AS Agent Only for Gard M.&e:, bergen

	 	10	% 	 	 Lloyds Syndicate NO 1897 Skuld

	 	10	% 	 	 Security Through Mar Risk Services Ltd.

	 	10	% 	 	 Lloyds Syndicate No. 1209 XL

	 	3	% 	 	 Mitsui Sumitomo Insurance Co. Ltd. Tokyo

	 	15	% 	 	 Norwegian Hull Club, Bergen (20134368)

	 	15	% 	 	 Tokio Marine & Nichido Fire

	  
	  
	 	 	
	 	100	% 	 	 Total

War Risk 
  

					
	 	100	% 	 	 The Norwegian Shipowners Mutual War Risk Insurance Association

P&I 
  

					
	 	100	% 	 	 Skuld

FDD 
  

					
	 	100	% 	 	 Nordisk

  
 22 

 Schedule 2 

ACCOUNTS 
 [Separate
attachment] 

  
 23 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Audited Combined Financial
Statements as of and for the Years Ended December 31, 2013 and 2012 
 Index to Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle
Tankers 15 AS Audited Combined Financial Statements as of and for the Years Ended December 31, 2013 and 2012 
  

					
	 Report of Independent Auditors
	  	 	2	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Combined Statement of Operations for the Years Ended
December 31, 2013 and 2012
	  	 	3	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Combined Balance Sheet as of December 31, 2013 and
2012
	  	 	4	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Combined Statement of Owner’s Equity for the Years Ended
December 31, 2013 and 2012
	  	 	5	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Combined Statement of Cash Flows for the Years Ended
December 31, 2013 and 2012
	  	 	6	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Notes to Combined Financial Statements as of and for the Years Ended
December 31, 2013 and 2012
	  	 	7	  

  
 1 

 Report of Independent Registered Public Accounting Firm 

To the Board of Directors of KNOT Offshore Partners LP 
 We have
audited the combined financial statements of Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS, which comprise the combined balance sheets as of December 31, 2013 and 2012, and the related combined statements of operations,
combined statements of owner’s equity and combined statements of cash flows for the years then ended, and the related notes to the combined financial statements. 

Management’s Responsibility for the Combined Financial Statements 

Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement,
whether due to fraud or error. 
 Auditor’s Responsibility 

Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the combined financial statements. 
 Opinion 

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Knutsen Shuttle Tanker
14 AS and Knutsen Shuttle Tanker 15 AS as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 /s/ Ernst & Young AS 
 Bergen, Norway 

June 23, 2014 

  
 2 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Combined Statements of Operations 

For the Years Ended December 31, 2013 and 2012 

(U.S. Dollars in thousands) 
  

									
	 	  	Year Ended
December 31,	 
	 	  	2013	 	 	2012	 
	 Time charter revenues
	  	$	12,451	  	 	$	—  	 
	 Total revenues (Notes 2(d), 4, 5, and 13)
	  	 	12,451	  	 	 	—  	 
	 Operating expenses: (Note 13)
	  				 			
	 Vessel operating expenses (Note 2(d))
	  	 	3,759	  	 	 	1	  
	 Depreciation and amortization (Note 9)
	  	 	3,303	  	 	 	—  	 
	 General and administrative expenses
	  	 	100	  	 	 	72	  
		  	  
	  
	 	 	  
	  
	 
	 Total operating expenses
	  	 	7,162	  	 	 	73	  
		  	  
	  
	 	 	  
	  
	 
	 Operating income
	  	 	5,289	  	 	 	(73	)
		  	  
	  
	 	 	  
	  
	 
	 Finance income (expense): (Notes 2(e) and 13)
	  				 			
	 Interest income
	  	 	1	  	 	 	1	  
	 Interest expense (Notes 6(a), 9(a) and 13)
	  	 	(2,293	)	 	 	(2	)
	 Other finance expense (Note 6(b))
	  	 	(749	)	 	 	(18	)
	 Net gain (loss) on foreign currency transactions
	  	 	748	  	 	 	(293	)
		  	  
	  
	 	 	  
	  
	 
	 Total finance expense
	  	 	(2,293	)	 	 	(312	)
		  	  
	  
	 	 	  
	  
	 
	 Income (loss) before income taxes
	  	 	2,996	  	 	 	(385	)
	 Income tax benefit (expense) (Note 12)
	  	 	—  	 	 	 	—  	 
		  	  
	  
	 	 	  
	  
	 
	 Net income (loss)
	  	$	2,996	  	 	$	(385	)
		  	  
	  
	 	 	  
	  
	 

 A Statement of Other Comprehensive Income (Loss) has not been presented as there are no items recognized in other
comprehensive income (loss). 
 The accompanying notes are an integral part of these financial statements 

  
 3 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Combined Balance Sheets 
 As of
December 31, 2013 and 2012 
 (U.S. Dollars in thousands) 

 

									
	 	  	December 31,	 
	 	  	2013	 	 	2012	 
	 Assets
	  				 			
	 Current assets:
	  				 			
	 Cash and cash equivalents (Notes 2(f) and 7)
	  	$	11,841	  	 	$	228	  
	 Trade accounts receivable, less allowance for doubtful accounts of $0 in 2013 and $0 in 2012
	  	 	3,777	  	 	 	—  	  
	 Receivables from owners and affiliates
	  	 	775	  	 	 	—  	  
	 Inventories (Note 2(h))
	  	 	289	  	 	 	—  	  
	 Other current assets (Notes 2(i) and 8(b))
	  	 	1,641	  	 	 	1,325	  
		  	  
	  
	 	 	  
	  
	 
	 Total current assets
	  	 	18,323	  	 	 	1,553	  
		  	  
	  
	 	 	  
	  
	 
	 Long-term assets:
	  				 			
	 Vessels and equipment (Notes 2(j), 2(k), 2(l), and 9):
	  				 			
	 Vessels
	  	 	287,486	  	 	 	—  	  
	 Vessels under construction
	  	 	—  	  	 	 	126,663	  
	 Less accumulated depreciation and amortization
	  	 	(3,303	)	 	 	—  	  
		  	  
	  
	 	 	  
	  
	 
	 Net property, plant, and equipment
	  	 	284,183	  	 	 	126,663	  
		  	  
	  
	 	 	  
	  
	 
	 Deferred debt issuance cost (Note 2(m))
	  	 	4,114	  	 	 	4,301	  
		  	  
	  
	 	 	  
	  
	 
	 Total assets
	  	$	306,620	  	 	$	132,517	  
		  	  
	  
	 	 	  
	  
	 
	 Liabilities and Owner’s Equity
	  				 			
	 Current liabilities:
	  				 			
	 Trade accounts payable
	  	$	580	  	 	$	28	  
	 Accrued expenses (Note 10)
	  	 	1,830	  	 	 	584	  
	 Current portion of long-term debt (Notes 7 and 11)
	  	 	19,500	  	 	 	2,438	  
	 Prepaid charter and deferred revenue (Note 2(o))
	  	 	1,487	  	 	 	—  	  
	 Payables to owners and affiliates
	  	 	7,065	  	 	 	9,667	  
	 Other current liabilities
	  	 	—  	  	 	 	218	  
		  	  
	  
	 	 	  
	  
	 
	 Total current liabilities
	  	 	30,462	  	 	 	12,935	  
		  	  
	  
	 	 	  
	  
	 
	 Long-term liabilities:
	  				 			
	 Long-term debt (Notes 7 and 11)
	  	 	212,063	  	 	 	73,269	  
	 Other long-term liabilities
	  	 	5,518	  	 	 	—  	  
		  	  
	  
	 	 	  
	  
	 
	 Total liabilities
	  	 	248,043	  	 	 	86,204	  
		  	  
	  
	 	 	  
	  
	 
	 Commitments and contingencies (Notes 2(p) and 14)
	  				 			
	 Equity:
	  				 			
	 Share capital, par value $366.3, 200 shares issued at December 31, 2013 and 2012
	  	 	73	  	 	 	73	  
	 Share premium
	  	 	43,077	  	 	 	43,077	  
	 Other paid in equity
	  	 	11,229	  	 	 	1,961	  
	 Retained earnings
	  	 	4,198	  	 	 	1,202	  
	 Total equity
	  	 	58,577	  	 	 	46,313	  
		  	  
	  
	 	 	  
	  
	 
	 Total liabilities and equity
	  	$	306,620	  	 	$	132,517	  
		  	  
	  
	 	 	  
	  
	 

 The accompanying notes are an integral part of these financial statements. 

  
 4 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Combined Statements of Owner’s Equity 

For the Years Ended December 31, 2013 and 2012 

(U.S. Dollars in thousands) 
  

																					
	 	  	Share Capital (1)	 	  	Share
Premium	 	  	Other
Paid-in
Equity	 	  	Retained
Earnings	 	 	Total Equity	 
	 Equity as of January 1, 2012
	  	$	73	  	  	$	43,077	  	  	$	—  	  	  	$	1,587	  	 	$	44,737	  
	 Net loss for the year
	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	(385	) 	 	 	(385	) 
	 Group contribution
	  	 	—  	  	  	 	—  	  	  	 	1,961	  	  	 	—  	  	 	 	1,961	  
	 Total equity as of December 31, 2012
	  	 	73	  	  	 	43,077	  	  	 	1,961	  	  	 	1,202	  	 	 	46,313	  
	 Net income for the year
	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	2,996	  	 	 	2,996	  
	 Group contribution
	  	 	—  	  	  	 	—  	  	  	 	9,268	  	  	 	—  	  	 	 	9,268	  
	 Total equity as of December 31, 2013
	  	$	73	  	  	$	43,077	  	  	$	11,229	  	  	$	4,198	  	 	$	58,577	  
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 

  

	(1)	All shares have the same rights in the Companies. 

 The accompanying notes are an integral
part of these financial statements. 

  
 5 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Combined Statements of Cash Flows 

For the Years Ended December 31, 2013 and 2012 

(U.S. Dollars in thousands) 
  

									
	 	  	Year Ended December 31,	 
	 	  	2013	 	 	2012	 
	 Cash flows provided by operating activities:
	  				 			
	 Net income (loss)
	  	$	2,996	  	 	$	(385	) 
	 Adjustments to reconcile net income (loss) to cash provided by operating activities:
	  				 			
	 Depreciation and amortization
	  	 	3,303	  	 	 	—  	  
	 Amortization of deferred debt issuance cost
	  	 	331	  	 	 	—  	  
	 Unrealized (gain) loss on foreign currency transactions
	  	 	(345	) 	 	 	346	  
	 Other items
	  	 	7,005	  	 	 	—  	  
	 Changes in operating assets and liabilities
	  				 			
	 Decrease (increase) in trade accounts receivable
	  	 	(3,777	) 	 	 	—  	  
	 Decrease (increase) in receivables from owner and affiliates
	  	 	(775	) 	 	 	—  	  
	 Decrease (increase) in inventories
	  	 	(289	) 	 	 	—  	  
	 Decrease (increase) in other current assets
	  	 	(118	) 	 	 	(397	) 
	 Increase (decrease) in trade accounts payable
	  	 	552	  	 	 	(54	) 
	 Increase (decrease) in payable to owners and affiliates
	  	 	7,065	  	 	 	—  	  
	 Increase (decrease) in accrued expenses
	  	 	1,246	  	 	 	365	  
	 Increase (decrease) in other liabilities
	  	 	(218	) 	 	 	218	  
		  	  
	  
	 	 	  
	  
	 
	 Net cash provided by operating activities
	  	 	16,976	  	 	 	93	  
		  	  
	  
	 	 	  
	  
	 
	 Cash flows from investing activities:
	  				 			
	 Disposals (additions) to vessel and equipment
	  	 	(160,054	) 	 	 	(46,334	) 
		  	  
	  
	 	 	  
	  
	 
	 Net cash used in investing activities
	  	 	(160,054	) 	 	 	(46,334	) 
		  	  
	  
	 	 	  
	  
	 
	 Cash flows from financing activities:
	  				 			
	 Proceeds from issuance of long-term debt
	  	 	158,294	  	 	 	39,035	  
	 Repayment of long-term debt
	  	 	(2,438	) 	 	 	—  	  
	 Payments of debt issuance cost
	  	 	(1,111	) 	 	 	(2,023	) 
	 Changes in payables to owners and affiliates
	  	 	(9,327	) 	 	 	7,343	  
	 Contributions from/distribution to owner, net
	  	 	9,268	  	 	 	1,961	  
		  	  
	  
	 	 	  
	  
	 
	 Net cash provided by (used in) financing activities
	  	 	154,686	  	 	 	46,316	  
		  	  
	  
	 	 	  
	  
	 
	 Effect of exchange rate changes on cash
	  	 	5	  	 	 	(6	) 
	 Net increase (decrease) in cash and cash equivalents
	  	 	11,613	  	 	 	69	  
	 Cash and cash equivalents at the beginning of the year
	  	 	228	  	 	 	159	  
		  	  
	  
	 	 	  
	  
	 
	 Cash and cash equivalents at the end of the year
	  	$	11,841	  	 	$	228	  
		  	  
	  
	 	 	  
	  
	 

 The accompanying notes are an integral part of these financial statements. 

  
 6 

 1) Description of Business 

Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS (hereafter referred as the “Companies”) own the 123,000 DWT Suez-max
shuttle tanker, Hilda Knutsen, and the 123,000 DWT Suez-max shuttle tanker, Torill Knutsen, respectively, delivered from Hyundai Heavy Industries (HHI) Shipyard in South Korea on August 5, 2013 and November 4, 2013. 

Knutsen Shuttle Tankers 14 AS was established on March 25, 2011 to take ownership of one building contract for one 123,000 DWT Suez-max
shuttle tanker, Hilda Knutsen, delivered on August 5, 2013. Knutsen Shuttle Tankers 15 AS was established on June 1, 2011 to take ownership of one building contract for one 123,000 DWT Suez-max shuttle tanker, Torill Knutsen,
delivered on November 4, 2013. Both the Hilda Knutsen and the Torill Knutsen (the “Vessels”) are on time-charter contracts to Eni Trading and Shipping S.p.A. (“Eni”), for operation primarily on the Goliat
offshore oil field outside northern Norway on a five-year time-charter agreement with five one-year-options. In the case of the charter for the Torill Knutsen, Eni has the option, at any time before May 31, 2016, to extend the charter term to
ten years in exchange for a reduction in the hire rate. 
 The Companies are owned by Knutsen NYK Offshore Tankers AS (“KNOT”),
and are operating as an integrated part of KNOT. KNOT is owned 50% by TS Shipping Invest AS (“TSSI”) and 50% by Nippon Yusen Kaisha (“NYK”). Technical and commercial management of the vessels have been subcontracted to Knutsen
OAS Shipping AS (“KOAS”) up to July 1, 2012 and thereafter by KNOT Management AS, a 100% owned subsidiary of KNOT. KOAS is controlled 99% by TSSI. 

There are no employees in the Companies and daily operation is managed by KNOT Management AS. 

2) Summary of Significant Accounting Policies 
 (a)
Basis of Preparation 
 The combined financial statements are prepared in accordance with accounting principles generally accepted in
the United States (“U.S. GAAP”). 
 (b) Reporting Currency 

The combined financial statements are prepared in the reporting currency of U.S. Dollars. The functional currency of the Companies is the
U.S. Dollar, because both entities operate in the international shipping market all revenues are U.S. Dollars denominated and the majority of the expenditures are made in U.S. Dollars. Transactions involving other currencies during the year are
converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. As of the balance sheet dates, monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated to
reflect the year-end exchange rates. Resulting gains and losses are reflected separately in the accompanying combined statements of operations. 
 (c)
Use of Estimates 
 The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives and impairment of Vessels, drydocking, and income taxes. 

(d) Revenues and Operating Expenses 

The Companies recognize revenues from time charters as operating leases on a straight-line basis over the term of the charter, net of any
commissions. Under time charters, revenue is not recognized during days the Vessel is off-hire. Revenue is recognized from delivery of the Vessel to the charterer, until the end of the contract period. Under time charters, the Companies are
responsible for 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. Fees received from customers for customized equipment are deferred and
recognized over the contract period. The Companies recognize revenues from spot contracts as voyage revenues using the percentage of completion method on a discharge-to-discharge basis. 

Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading
expenses, canal tolls and agency fees. Voyage expenses are paid by the customer under time charters. 
 Vessel operating expenses include
crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. Vessel operating expenses are paid by the Companies for time charters and during off-hire and are recognized when incurred. 

As further discussed in Note 13—Related Party Transactions, related parties have provided the management services for the Vessels and
employ the crews that work on the Vessels. The Companies have no direct employees and, accordingly, are not liable for any pension or post-retirement benefits. 

(e) Financial Income (Expense) 

Interest expenses incurred on the Companies’ debt incurred during the construction of the Vessels exceeding one year are capitalized
during the construction period. 

  
 7 

 (f) Cash and Cash Equivalents 

The Companies consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 (g) Trade Accounts Receivable 

Accounts receivable are recorded at the invoiced amount and do not bear interest. Under terms of the current time charters, the customers are
committed to pay for the full month’s charter the first day of each month. See Note 2(o) —Summary of Significant Accounting Policies: Prepaid Charter and Deferred Revenue. The allowance for doubtful accounts is the Companies’ best
estimate of the amount of probable credit losses in existing accounts receivable. The Companies establish provisions for doubtful accounts on a case-by-case basis when it is unlikely that required payments of specific amounts will occur. In
establishing these provisions, the Companies consider the financial condition of the customer as well as specific circumstances related to the receivable. Receivable amounts determined to be unrecoverable are written-off. There were no provisions as
allowance for doubtful accounts or amounts written-off against the allowance for doubtful accounts as of December 31, 2013 and 2012. The Companies do not have any off-balance-sheet credit exposure related to their customers. 

(h) Inventories 
 Inventories,
which are comprised principally of lubricating oils, are stated at the lower of cost or market. For vessels on time charters, there are no bunkers, as the charterer supplies the bunkers, which principally consist of fuel oil. Cost is determined
using the first-in, first-out method for all inventories. 
 (i) Other Current Assets 

Other current assets principally consist of prepaid expenses, the current portion of deferred cost and other receivables. 

(j) Vessels and Equipment 
 Vessels
and equipment are stated at the historical acquisition or construction cost, including capitalized interest, supervision and technical and delivery cost, net of accumulated depreciation and impairment loss, if any. Expenditures for subsequent
conversions and major improvements are capitalized, provided that such costs increase the earnings capacity or improve the efficiency or safety of the vessels. 

Generally, the Companies drydock each vessel every 60 months until the vessel is 15 years old and every 30 months thereafter, as required for
the renewal of certifications issued by classification societies. For vessels operating on time charters, the Companies capitalize the costs directly associated with the classification and regulatory requirements for inspection of the vessels, major
repairs and improvements incurred during drydocking. Drydock cost is amortized on a straight-line basis over the period until the next planned drydocking takes place. The Companies expense costs related to routine repairs and maintenance performed
during drydocking or as otherwise incurred. For vessels that are newly built or acquired, an element of the cost of the vessel is initially allocated to a drydock component and amortized on a straight-line basis over the period until the next
planned drydocking. When significant drydocking expenditures occur prior to the expiration of this period, the Companies expense the remaining unamortized balance of the original drydocking cost in the month of the subsequent drydocking. For vessels
operating on bareboat charters, the charter party bears the cost of any drydocking. 
 Depreciation on vessels and equipment is calculated
on a straight-line basis over the asset’s estimated useful life, less an estimated residual value, as follows: 
  

					
	 	  	Useful Life	 
	 Hull
	  	 	25 years	  
	 Anchor-handling, loading and unloading equipment
	  	 	25 years	  
	 Main/auxiliary engine
	  	 	25 years	  
	 Thruster, dynamic positioning systems, cranes and other equipment
	  	 	25 years	  
	 Drydock costs
	  	 	2.5–5 years	  

 A Vessel is depreciated to its estimated residual value, which is calculated based on the weight of the ship
and estimated steel price. Any cost related to the disposal is deducted from the residual value. 
 (k) Capitalized Interest 

Interest expense incurred on the Companies’ debt during the construction of the Vessels exceeding one year is capitalized during the
construction period. 
 (l) Impairment of Long-Lived Assets 

Vessels and equipment, vessels under construction and intangible assets subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Companies first compare undiscounted cash flows
expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying
value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. 

  
 8 

 (m) Debt Issuance Costs 

Debt issuance costs, including fees, commissions and legal expenses, are deferred. Debt issuance costs of term loans are amortized over the
term of the relevant loan. Amortization of debt issuance costs is included in interest expense. 
 (n) Income Taxes 

The tax expense in the income statement includes both tax payable and changes in deferred tax. Deferred tax is calculated at 28% on the basis
of temporary differences between accounting and tax values and tax loss carried forward at the year end. Tax increasing and tax reducing temporary differences which reverse or may be reversed in the same period are assessed and netted. The Companies
are subject to the Norwegian Tonnage Tax regime (“the tonnage tax regime”). Under the tonnage tax regime, the tax is based on the tonnage of the vessel and the 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. Tonnage tax is classified as an operating expense. To be within the scheme the Companies should meet certain requirements, such as only ownership of ship/ shares in the
shipping companies, and only own certain types of financial assets. 
 (o) Prepaid Charter and Deferred Revenue 

Under terms of the time charters, the customer pays for the month’s charter the first day of each month and that is recorded as prepaid
charter revenues. Deferred revenues for fees received from customers for customized equipment are classified as prepaid charter and deferred revenue for the current portion and as other long-term liabilities for the non-current portion. 

(p) Commitments, Contingencies and Insurance Proceeds 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. See Note 14—Commitments and Contingencies. 

Insurance claims for property damage for recoveries up to the amount of loss recognized are recorded when the claims submitted to insurance
carriers are probable of recovery. Claims for property damage in excess of the loss recognized and for loss off-hire are considered gain contingencies, which are generally recognized when the proceeds are received. 

(q) Fair Value Measurements 
 The
Companies utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Companies determines fair value based on assumptions that market participants would use in
pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs,
which are categorized in one of the following levels: 
  

	 	•	 	Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. 

 

	 	•	 	Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or
liability. 

  

	 	•	 	Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if
any, market activity for the asset or liability at the measurement date. 

 (r) Recently Issued Accounting Standards 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair
Value measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The new standards do not extend the use of fair value but, rather, provide guidance
about how fair value should be applied where it already is required or permitted under International Financial Reporting Standards (“IFRS”) or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording
changes to align with IFRS. A public entity is required to apply ASC 2011-04 prospectively for interim and annual periods beginning after December 5, 2011. The adoption of ASU 2011-04 did not have a material impact on the Companies’
combined financial statements. 
 In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about
Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements
on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and
interim periods within those annual periods. Retrospective application is required. The Companies adopted the provisions of ASU 2011-11 as of January 1, 2013. The adoption of ASU 2011-11 did not have a material impact on the Companies’
combined financial statements. 

  
 9 

 In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires reporting and disclosure about changes in accumulated other comprehensive income (“AOCI”) balances and reclassifications out of AOCI. For public
companies, the ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Companies’ combined financial
statements. 
 There are no recent accounting pronouncements issued whose adoption would have a material impact on the Companies’
financial statements in the current year or are expected to have a material impact on future years. 
 3) Significant Risks and Uncertainties Including
Business and Credit Concentrations 
 Each of the Vessels is currently employed under long-term fixed charters, which mitigates earnings
risk. The Companies’ operational results are dependent on the worldwide market for shuttle tankers and timing of entrance into long-term charters. Market conditions for shipping activities are typically volatile, and, as a consequence, the hire
rates may vary from year to year. The market is mainly dependent upon two factors: the supply of vessels and the overall growth in the world economy. The general supply of vessels is a combination of newbuilds, demolition activity of older vessels
and legislation that limits the use of older vessels or new standards for vessels used in specific trades. 
 The Companies did not incur
any loss relating to their customers during the years ended December 31, 2013, and 2012. 
 The following table presents revenues and
percentage of combined revenues for customers that accounted for more than 10% of the combined revenues during the years ended December 31, 2013, and 2012. 
  

																	
	 	  	Year Ended December 31,	 
	 (U.S. Dollars in thousands)
	  	2013	 	 	2012	 
	 Eni Trading and Shipping S.p.A
	  	$	12,451	  	  	 	100	%	 	$	—  	 	  	 	0	%

 The Companies have financial assets that expose them to credit risk arising from possible default by a
counterparty. The Companies consider their counterparties to be creditworthy financial institutions and do not expect any significant loss to result from non-performance by such counterparties. The maximum loss due to credit risk that the Companies
would incur if counterparties failed completely to perform would be the carrying value of cash and cash equivalents and trade accounts receivable. The Companies, in the normal course of business, do not demand collateral from their counterparties.

 4) Operating Leases 
 The time
charters of the vessels with third parties are accounted for as operating leases. The minimum contractual future revenues to be received from time charters as of December 31, 2013, were as follows: 

 

					
	(U.S. Dollars in thousands)	  	 	 
	 2014
	  	$	44,472	  
	 2015
	  	 	44,472	  
	 2016
	  	 	44,472	  
	 2017
	  	 	44,472	  
	 2018
	  	 	32,188	  
	 2019 and thereafter
	  	 	0	  
		  	  
	  
	 
	 Total
	  	$	210,076	  
		  	  
	  
	 

  

	 	•	 	Knutsen Shuttle Tanker 14 AS owns the vessel, Hilda Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in August 2018, with Eni, with five one-year-options to
extend until August 2023. 

  

	 	•	 	Knutsen Shuttle Tanker 15 AS owns the vessel, Torill Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in November 2018, with Eni, with five one-year-options to
extend until November 2023. In the case of the charter for the Torill Knutsen, Eni has the option, at any time before May 31, 2016, extend the charter term to ten years in exchange for a reduction in the hire rate. 

5) Segment Information 
 The Companies
have not presented segment information as they consider their operations to occur in one reportable segment, the shuttle tanker market. In time charters, the charterer, not the Companies, controls the choice of which trading areas the vessel will
serve. Accordingly, the Companies’ management, including the chief operating decision makers, does not evaluate performance according to geographical region. 

During 2013, the vessels operated under two charters. See Note 3—Significant Risks and Uncertainties Including Business and Credit
Concentrations for revenues from customers accounting for over 10% of the combined revenue. In both time charters, the charterer controls the choice of which trading areas the Vessels will serve. Accordingly, the Companies’ management,
including the chief decision makers, do not evaluate performance according to geographical region. 

  
 10 

 6) Finance Income (Expense) 

(a) Interest Expense 
 A
reconciliation of total interest cost to interest expense as reported in the statement of operations for the years ended December 31, 2013 and 2012 is as follows: 
  

									
	(U.S. Dollars in thousands)	  	2013	 	  	2012	 
	 Interest cost capitalized
	  	$	2,762	  	  	$	2,557	  
	 Interest expense
	  	 	2,293	  	  	 	2	  
		  	  
	  
	 	  	  
	  
	 
	 Total interest cost
	  	$	5,055	  	  	$	2,559	  
		  	  
	  
	 	  	  
	  
	 

 (b) Other Finance Expense 

The following table presents the other finance expense for the years ended December 31, 2013 and 2012: 

 

									
	(U.S. Dollars in thousands)	  	2013	 	  	2012	 
	 Bank fees, charges and external guarantee costs
	  	$	76	  	  	$	18	  
	 Related party guarantee commission
	  	 	673	  	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Total other finance expense
	  	$	749	  	  	$	18	  
		  	  
	  
	 	  	  
	  
	 

 7) Fair Value Measurements 

(a) Fair Value of Financial Instruments 

The following table presents the carrying amounts and estimated fair values of the Companies’ financial instruments as of
December 31, 2013 and 2012. 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. 

 

																	
	 	  	December 31, 2013	 	  	December 31, 2012	 
	(U.S. Dollars in thousands)	  	Carrying
Amount	 	  	Fair Value	 	  	Carrying
Amount	 	  	Fair
Value	 
	 Financial assets:
	  				  				  				  			
	 Cash and cash equivalents
	  	$	11,841	  	  	$	11,841	  	  	$	228	  	  	$	228	  
	 Financial liabilities:
	  				  				  				  			
	 Long-term debt, current and non-current
	  	 	231,563	  	  	 	232,894	  	  	 	75,707	  	  	 	74,162	  

 The carrying amounts shown in the table above are included in the Companies’ balance sheets under the
indicated captions. 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 December 31, 2013 and 2012 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 Companies’ own judgment about the assumptions that market participants would use in pricing the asset or
liability. Those judgments are developed by the Companies 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: The fair value of the Companies’ cash balances approximates the carrying amounts due to the current nature of the amounts. 

 

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

  
 11 

 (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 December 31, 2013 and 2012: 
  

																	
	 	  	 	 	  	Fair Value Measurements at
Reporting Date Using	 
	(U.S. Dollars in thousands)	  	December 31,
2013	 	  	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
	  	$	11,841	  	  	$	11,841	  	  	$	—  	 	  	$	—  	  
	 Financial liabilities:
	  				  				  				  			
	 Long-term debt, current and non-current
	  	 	232,894	  	  	 	—  	 	  	 	232,894	  	  	 	—  	 

  

																	
	 	  	 	 	  	Fair Value Measurements at
Reporting Date Using	 
	(U.S. Dollars in thousands)	  	December 31,
2012	 	  	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
	  	$	228	  	  	$	228	  	  	$	—  	 	  	$	—  	  
	 Financial liabilities:
	  				  				  				  			
	 Long-term debt, current and non-current
	  	 	74,162	  	  	 	—  	 	  	 	74,162	  	  	 	—  	 

 The Companies’ 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 December 31, 2013 and 2012. 

8) Trade Accounts Receivables 
 (a) Trade Accounts
Receivables 
 Trade accounts receivable are presented net of provisions for doubtful accounts. As of December 31, 2013 and
2012, there was no provision for doubtful accounts. 
 (b) Other Current Assets 

Other current assets consist of the following: 
  

									
	 	  	Year Ended December 31,	 
	(U.S. Dollars in thousands)	  	2013	 	  	2012	 
	 Refund of value added tax
	  	$	88	  	  	$	206	  
	 Prepaid expenses
	  	 	43	  	  	 	—  	 
	 Current portion of deferred debt issuance cost
	  	 	1,120	  	  	 	923	  
	 Other receivable
	  	 	390	  	  	 	196	  
		  	  
	  
	 	  	  
	  
	 
	 Total other current assets
	  	$	1,641	  	  	$	1,325	  
		  	  
	  
	 	  	  
	  
	 

  
 12 

 9) Vessels and Equipment 
  

																	
	(U.S. Dollars in thousands)	  	Vessel &
equipment	 	  	Vessel under
construction	 	 	Accumulated
depreciation	 	 	Net vessels	 
	 Balance December 31, 2011
	  	$	—  	 	  	$	79,533	 	 	$	—  	 	 	$	79,533	 
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Additions
	  	 	—  	 	  	 	47,130	  	 	 	—  	 	 	 	47,130	  
	 Drydock costs
	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 
	 Transfer from vessels under construction
	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 
	 Disposal
	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 
	 Depreciation
	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Balance December 31, 2012
	  	$	—  	 	  	$	126,663	 	 	$	—  	 	 	$	126,663	 
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Additions
	  	 	—  	 	  	 	155,823	  	 	 	—  	 	 	 	155,823	  
	 Drydock costs
	  	 	5,000	  	  	 	—  	 	 	 	—  	 	 	 	5,000	  
	 Transfer from vessels under construction
	  	 	282,486	  	  	 	(282,486	)	 	 	—  	 	 	 	—  	 
	 Disposal
	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 
	 Depreciation
	  	 	—  	 	  	 	—  	 	 	 	(3,303	)	 	 	(3,303	)
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Balance December 31, 2013
	  	$	287,486	  	  	 	—  	 	 	$	(3,303	)	 	$	284,183	  
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 

 As of December 31, 2013 and 2012, Vessels with a book value of $ 287.5 million and $
126.7 million, respectively, are pledged as security held as a guarantee for the Companies’ long-term debt. See Note 11—Long-Term Debt. 

Drydocking activity for the years ended December 31, 2013 and 2012 is summarized as follows: 

 

									
	 	  	Year Ended
December 31,	 
	(U.S. Dollars in thousands)	  	2013	 	 	2012	 
	 Balance at the beginning of the year
	  	$	—  	 	 	$	—  	 
	 Costs incurred for drydocking
	  	 	5,000	  	 	 	—  	 
	 Drydock amortization
	  	 	(291	)	 	 	—  	 
		  	  
	  
	 	 	  
	  
	 
	 Balance at the end of the year
	  	$	4,709	  	 	$	—  	 
		  	  
	  
	 	 	  
	  
	 

 10) Accrued Expenses 

The following table presents accrued expenses as of December 31, 2013 and 2012: 

 

									
	 	  	Year Ended December 31,	 
	(U.S. Dollars in thousands)	  	2013	 	  	2012	 
	 Operating expenses
	  	$	670	  	  	$	163	  
	 Interest expenses
	  	 	1,160	  	  	 	421	  
		  	  
	  
	 	  	  
	  
	 
	 Total accrued expenses
	  	$	1,830	  	  	$	584	  
		  	  
	  
	 	  	  
	  
	 

 11) Long-Term Debt 

Long-term debt as of December 31, 2013 and 2012 consisted of following: 

 

											
	(U.S. Dollars in thousands)	  	Vessel	  	December 31,
2013	 	  	December 31,
2012	 
	 $117 million Loan facility
	  	Hilda Knutsen	  	$	114,563	  	  	$	44,359	  
	 $117 million Loan facility
	  	Torill Knutsen	  	 	117,000	  	  	 	31,348	  
		  		  	  
	  
	 	  	  
	  
	 
	 Total long-term debt
	  		  	 	231,563	  	  	 	75,707	  
	 Less current installments
	  		  	 	19,500	  	  	 	2,438	 
		  		  	  
	  
	 	  	  
	  
	 
	 Long-term debt, excluding current
	  		  	$	212,063	  	  	$	73,269	  
		  		  	  
	  
	 	  	  
	  
	 

  
 13 

 Hilda Facility 

The $117 million secured loan facility (the “Hilda Facility”) is repayable in quarterly installments over five years with a final
balloon payment due at maturity in August 2018. The Hilda Facility bears interest at LIBOR plus a fixed margin of 2.5%. 
 The Hilda
Knutsen , assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Hilda Facility. KNOT is the sole guarantor. 

The Hilda Facility contains the following financial covenants: 
  

	 	•	 	Market value of the Hilda Knutsen to be no less than 100% of the outstanding balance under the Hilda Facility for the first 4 years and 125% for the 5th year;

  

	 	•	 	Positive working capital of the borrower and of KNOT and its subsidiaries on a consolidated basis (“KNOT Group”); 

  

	 	•	 	Minimum liquidity of (i) $2 million for the borrower; (ii) $25 million for the guarantor, and (iii) 4% of interest bearing debt for the KNOT Group; 

 

	 	•	 	Minimum book equity ratio for the KNOT Group of 22.5 % until December 31, 2014, and thereafter 25%; and 

  

	 	•	 	EBITDA must exceed interest payable, any amounts payable for the interest rate swaps and debt installments for the KNOT Group calculated on a four quarter rolling basis. 

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. 
 The borrower and the guarantor were in compliance with all covenants as
of December 31, 2013. However, as of December 31, 2012, a waiver was obtained for the Hilda Facility for KNOT Group’s compliance with the EBITDA covenant for all interim and annual periods from December 31, 2011 to
January 31, 2014. In addition, the minimum book equity ratio for the KNOT Group was reduced from 22.5% to 19% for all interim and annual periods starting December 31, 2012 to January 31, 2014. Except for the EBITDA covenant covered by
the waiver, the borrower, the guarantor and KNOT Group were in compliance with all covenants, as amended, as of December 31, 2012. 
 Torill
Facility 
 The $117 million secured loan facility (the “Torill Facility”) is repayable in quarterly installments over five
years with a final balloon payment due at maturity in November 2018. The Torill Facility bears interest at LIBOR plus a fixed margin of 2.75%. 

The Torill Knutsen, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Hilda
Facility. Knutsen NYK Offshore Tankers AS is the sole guarantor. 
 The Torill Facility contains the following financial covenants: 

 

	 	•	 	Market value of the Torill Knutsen to be no less than 100% of the outstanding balance under the Torill Facility for the first 4 years and 125% for the 5th
year; 

  

	 	•	 	Positive working capital of the borrower and KNOT Group; 

  

	 	•	 	Minimum liquidity of (i) $2 million for the borrower; (ii) $25 million for the guarantor, and (iii) 4% of interest bearing debt for the KNOT Group; 

 

	 	•	 	Minimum book equity ratio for the KNOT Group of 22.5 % until December 31, 2014, and thereafter 25%; and 

  

	 	•	 	EBITDA must exceed interest payable, any amounts payable for the interest rate swaps and debt installments for the KNOT Group calculated on a four quarter rolling basis. 

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. 
 The borrower and the guarantor were in compliance with all
covenants as of December 31, 2013. However, as of December 31, 2012, a waiver was obtained for the Torill Facility for KNOT Group’s compliance with the EBITDA covenant for all interim and annual periods from December 31, 2011 to
January 31, 2014. In addition, the minimum book equity ratio for the KNOT Group was reduced from 22.5% to 19% for all interim and annual periods starting December 31, 2012 to January 31, 2014. Except for the EBITDA covenant covered by
the waiver, the borrower, the guarantor and KNOT Group were in compliance with all covenants, as amended, as of December 31, 2012. 

  
 14 

 The total outstanding debt as of December 31, 2013 is repayable as follows: 

 

					
	(US $ in thousands)	  	 	 
	 2014
	  	$	19,500	  
	 2015
	  	 	19,500	  
	 2016
	  	 	19,500	  
	 2017
	  	 	19,500	  
	 2018 and thereafter
	  	 	153,563	  
	 Total
	  	$	231,563	  

 12) Income Taxes 

Components of Current and Deferred Tax Expense (Benefit) 

The Companies are subject to the Norwegian Tonnage Tax regime (“the tonnage tax regime”). Under the tonnage tax regime, the tax is
based on the tonnage of the vessel and the 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. Tonnage tax is classified as an operating expense.
Tonnage tax amounted to $13,000 in 2013 and $0.0 in 2012. 
  

									
	 	  	Year Ended
December 31,	 
	(US $ in thousands)	  	2013	 	 	2012	 
	 Income (loss) before income taxes
	  	$	2,996	  	 	$	(385	)
	 Income tax expense (benefit)
	  	 	—  	 	 	 	—  	 
	 Effective tax rate
	  	 	0	% 	 	 	0	% 

 A valuation allowance for deferred tax assets is recorded when it is more likely than not that some of or all
of the benefit from the deferred tax asset will not be realized. The valuation allowances relate to the financial loss carry forwards and other deferred tax assets for tonnage tax that, in the judgment of the Companies, are more-likely-than not to
be realized reflecting the Companies’ cumulative loss position for tonnage tax. In assessing the realizability of deferred tax assets, the Companies consider 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, and there is no deferred tax assets recognized as of December 31, 2013 and December 31, 2012. 

The financial loss carry forwards for tonnage tax have no expiration dates. 

The Companies’ Norwegian income tax returns are subject to examination by Norwegian tax authorities going back ten years from 2013. The
Companies had no unrecognized tax benefits as of December 31, 2013 and 2012. During the years ended December 31, 2013 and 2012, the Companies did not incur any interest or penalties on its tax regime. 

13) Related Party Transactions 
 (a) Related Parties

 The Companies are owned 100% by KNOT. KNOT is owned 50% by TSSI and 50% by NYK. TSSI also controls 99% of KOAS, which subcontracts
services to Knutsen OAS Management AS, which served as the vessel management companies for KNOT and its subsidiaries until June 30, 2012. As of July 1, 2012, KNOT Management AS, a 100% owned subsidiary of KNOT, assumed responsibility for
the commercial and technical management of the Vessels. 
 The Companies have been charged by KNOT, KOAS and TSSI for commercial services
related to the charters, technical and operational support related to the operation of the Vessels, certain administrative costs and finance fees, as well as fees for shipyard supervision for the Vessels under construction. The amounts of such
costs and expenses included in the combined statements of operations for the years ended December 31, 2013, and 2012 are as follows: 

  
 15 

									
	 	  	Years Ended December 31,	 
	(U.S. Dollars in thousands)	  	2013	 	  	2012	 
	 Statements of operations:
	  				  			
	 Time charter revenues:
	  				  			
	 Commercial commission fee from KNOT to Vessels (1)
	  	$	154	  	  	$	—  	  
	 Operating expenses:
	  				  			
	 Technical and operational management fee from KOAS and KNOT to Vessels (2)
	  	 	244	  	  	 	—  	 
	 General and administrative expenses:
	  				  			
	 Administration fee from KNOT (3)
	  	 	60	  	  	 	61	  
	 Accounting service fee from KNOT (4)
	  	 	7	  	  	 	7	  
	 Finance expense:
	  				  			
	 Interest expense charged from KNOT (5)
	  	 	86	  	  	 	—  	 
	 Guarantee commission from KNOT to Vessels (6)
	  	 	673	  	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	1,224	  	  	$	68	  
		  	  
	  
	 	  	  
	  
	 

  

									
	 	  	Years Ended December 31,	 
	(U.S. Dollars in thousands)	  	2013	 	  	2012	 
	 Balance sheets:
	  				  			
	 Vessels:
	  				  			
	 New building supervision fee from KOAS to Vessels (7)
	  	$	2,350	  	  	$	2,500	  
	 Licensing of technology fees from TSSI to Vessels (8)
	  	 	1,080	  	  	 	2,520	  
	 Interest capitalized charged from KNOT to subsidiaries (9)
	  	 	395	  	  	 	491	  
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	3,825	  	  	$	5,511	  
		  	  
	  
	 	  	  
	  
	 

  

	(1)	Commercial commission fee from KNOT to Vessels: KNOT provides commercial services related to negotiating and maintaining the charters. KNOT invoices a fixed percentage of revenue as a commercial commission fee
for these services. 

	(2)	Technical and operational management fee from KOAS and KNOT to Vessels: KOAS and KNOT provides technical and operational management of the vessels on time charter including crewing, purchasing, maintenance and
other operational, bookkeeping and administrative support. 

	(3)	Administration fee from KNOT: Administration costs include the compensation and benefits of KNOT management and administrative staff as well as other general and administration expenses. Net administration costs
are total administration cost plus a 5% margin, reduced for the total fees for services delivered by the administration staffs (the accounting service fees (see (4) below), the financing service fees (see (6) below) 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. 

	(4)	Accounting service fee from KNOT: KNOT invoiced each subsidiary a fixed fee for the preparation of the statutory financial statements. 

	(5)	Interest expense charged from, interest income charged to KNOT: KNOT invoiced interest expense (income) for any outstanding payables to (receivable from) owners and affiliates to the vessel-owning subsidiaries.
Interest expense has been allocated based upon the allocated payables to owners and affiliates and the historical interest rates charged. 

	(6)	Guarantee commission from KNOT to Vessels: KNOT was a guarantor for the Companies’ loan facilities (see Note 11—Long-term Debt and Note 13(b)—Related Party Transactions: Guarantees). KNOT invoiced
an annual commission to each of the Vessels as a fixed percentage of the outstanding balance as compensation for the guarantee. 

	(7)	New building supervision fee from KOAS to Vessels: KOAS charges a fixed fee for supervision of each vessel under construction that is invoiced on a straight-line basis over the period of construction. Such fees,
along with direct and incremental supervision costs incurred, are capitalized as part of the Vessels under construction. 

	(8)	Knutsen Ballast Water Treatment installation from TSSI to Vessel: TSSI has developed Knutsen ballast water treatment technology and the system was installed during the construction and all cost is capitalized as
part of the Vessels under construction. 

	(9)	Interest capitalized charged from KNOT to Vessels: KNOT invoiced interest expense for outstanding payables to owners and affiliates to the vessel owning subsidiaries as explained in (5) above. Such interest
expense is capitalized for qualifying Vessels under construction. 

 (b) Guarantees 

As of December 31, 2013 and 2012, KNOT is guarantor for the Hilda Facility and Torill Facility. 

  
 16 

 (c) Transaction with Management 

The Companies had no personnel during 2013 and 2012. There has been no direct remuneration to any members of the Board of Directors of KNOT.
Trygve Seglem, the President and CEO of KNOT has received $474,000 and $427,000, respectively in salary from KNOT Management AS during 2013 and 2012. He also controls Seglem Holding AS, which has a 100% equity interest of TSSI, which controls KOAS.
TSSI owns 50% in KNOT. Trygve Seglem owns 70% of the equity interests in Seglem Holding AS, and each of his daughters, Synnøve Seglem and Jorunn Seglem, each own 15% of the equity interests. 

In 2013 and 2012, all remuneration and cost related to the members of the Board of Directors of KNOT was paid directly by the respective
owners of KNOT. 
 NYK, which own 50% of KNOT, has management and administrative personnel on secondment to KNOT starting in March 2011. The
cost for such services was $1.3 million in 2013 and $639,000 in 2012. NYK has no other related party transactions with KNOT apart from interest income on financing offered to KNOT. 

See this Note 13 – Related Party Transactions Items 3 and 4 for discussion of the allocation principles for KNOT’s administrative
costs, including management and administrative staff, included in the combined statements of operations for the two entities. 
 (d) Amounts Due from
(to) Related Parties 
 Balances with related parties consisted of the following: 

 

									
	(U.S. Dollars in thousands)	  	At December 31,
2013	 	  	At December 31,
2012	 
	 Balance Sheets:
	  				  			
	 Trading balances due from KNOT and affiliates
	  	$	775	  	  	$	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Amount due from related parties
	  	$	775	  	  	$	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Trading balances due to KOAS
	  	$	143	  	  	$	—  	 
	 Trading balances due to KNOT and affiliates
	  	 	6,922	  	  	 	9,667	  
		  	  
	  
	 	  	  
	  
	 
	 Amount due to related parties
	  	$	7,065	  	  	$	9,667	  
		  	  
	  
	 	  	  
	  
	 

 Amounts due from (to) related parties are unsecured and intended to be settled in the ordinary course of
business. They primarily relate to vessel management and other fees due to KNOT and KOAS. 
 14) Commitments and Contingencies 

Assets Pledged 
 As of
December 31, 2013 and 2012, Vessels with a book value of $ 287.5 million and $ 126.7 million, respectively, were pledged as security held as guarantee for the Companies’ long-term debt obligations. See Note 11—Long-Term
Debt. 
 Insurance 
 The
Companies maintain insurance to insure against marine and war risks, which include damage to or total loss of the Vessels, subject to deductible amounts that average $0.150 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 Companies maintain 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 Companies may be required to pay amounts above budgeted premiums if the member claims exceed association reserves, subject to certain reinsured amounts. If the Companies experience
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 Companies’ results of operations and financial condition.

  
 17 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Unaudited Combined Financial
Statements as of
 March 31, 2014 and for the Three Months Ended March 31, 2014 and 2013 

Index to Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Unaudited Combined Financial Statements as of 

March 31, 2014 and for the Three Months Ended March 31, 2014 and 2013 

 

					
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Unaudited Combined Statement of Operations for the Three Months Ended
March 31, 2014 and 2013
	  	 	2	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Unaudited Combined Balance Sheets as of March 31, 2014 and
December 31, 2013
	  	 	3	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Unaudited Combined Statements of Owner’s Equity for the Three
Months Ended March 31, 2014 and 2013
	  	 	4	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Unaudited Combined Statements of Cash Flows for the Three Months Ended
March 31, 2014 and 2013
	  	 	5	  
	 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS Notes to Unaudited Combined Financial Statements as of March 31,
2014 and for the Three Months Ended March 31, 2014 and 2013
	  	 	6	  

  
 1 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Unaudited Combined Statement of Operations 

For the Three Months Ended March 31, 2014 and 2013 

(U.S. Dollars in thousands) 
  

									
	 	  	Three Months Ended
March 31,	 
	 	  	2014	 	 	2013	 
	 Time charter revenues
	  	$	11,372	  	 	$	—  	 
	 Total revenues (Notes 2(d), 4, 5, and 14)
	  	 	11,372	  	 	 	—  	 
	 Operating expenses: (Note 14)
	  				 			
	 Vessel operating expenses (Note 2(d))
	  	 	2,675	  	 	 	—  	 
	 Depreciation and amortization (Note 10)
	  	 	2,835	  	 	 	—  	 
	 General and administrative expenses
	  	 	45	  	 	 	25	  
		  	  
	  
	 	 	  
	  
	 
	 Total operating expenses
	  	 	5,555	  	 	 	25	  
		  	  
	  
	 	 	  
	  
	 
	 Operating income
	  	 	5,817	  	 	 	(25	)
		  	  
	  
	 	 	  
	  
	 
	 Finance income (expense): (Notes 2(e) and 14)
	  				 			
	 Interest income
	  	 	15	  	 	 	—  	 
	 Interest expense (Notes 6(a) and 14)
	  	 	(1,979	) 	 	 	—  	 
	 Other finance expense (Note 6(b))
	  	 	(281	) 	 	 	(148	)
	 Realized and unrealized gain (loss) on derivative instruments (Note 7)
	  	 	632	  	 	 	—  	 
	 Net gain (loss) on foreign currency transactions
	  	 	(31	) 	 	 	486	  
		  	  
	  
	 	 	  
	  
	 
	 Total finance expense
	  	 	(1,644	) 	 	 	338	  
		  	  
	  
	 	 	  
	  
	 
	 Income (loss) before income taxes
	  	 	4,173	  	 	 	313	  
	 Income tax benefit (expense) (Note 13)
	  	 	—  	 	 	 	—  	 
		  	  
	  
	 	 	  
	  
	 
	 Net income (loss)
	  	$	4,173	  	 	$	313	  
		  	  
	  
	 	 	  
	  
	 

 A Statement of Other Comprehensive Income has not been presented as there are no items recognized in other comprehensive
income. 
 The accompanying notes are an integral part of these financial statements. 

  
 2 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Unaudited Combined Balance Sheets 

As of March 31, 2014 and December 31, 2013 

(U.S. Dollars in thousands) 
  

									
	 	  	March 31,
2014	 	 	December 31,
2013	 
	 Assets
	  				 			
	 Current assets:
	  				 			
	 Cash and cash equivalents (Notes 2(f) and 8)
	  	$	6,860	  	 	$	11,841	  
	 Trade accounts receivable, less allowance for doubtful accounts of $0 in March 31, 2014 and December 31, 2013
	  	 	—  	  	 	 	3,777	  
	 Receivables from owners and affiliates
	  	 	3,331	  	 	 	775	  
	 Inventories (Note 2(h))
	  	 	260	  	 	 	289	  
	 Other current assets (Notes 2(i) and 9(b))
	  	 	2,409	  	 	 	1,641	  
		  	  
	  
	 	 	  
	  
	 
	 Total current assets
	  	 	12,860	  	 	 	18,323	  
		  	  
	  
	 	 	  
	  
	 
	 Long-term assets:
	  				 			
	 Vessels and equipment (Notes 2(j), 2(k), 2(l), and 10):
	  				 			
	 Vessels
	  	 	287,607	  	 	 	287,486	  
	 Vessels under construction
	  	 	—  	 	 	 	—  	 
	 Less accumulated depreciation and amortization
	  	 	(6,138	)	 	 	(3,303	)
		  	  
	  
	 	 	  
	  
	 
	 Net property, plant, and equipment
	  	 	281,469	  	 	 	284,183	  
		  	  
	  
	 	 	  
	  
	 
	 Deferred debt issuance cost (Note 2(m))
	  	 	3,885	  	 	 	4,114	  
	 Derivative assets (Notes 7 and 8)
	  	 	1,550	  	 	 	—  	 
		  	  
	  
	 	 	  
	  
	 
	 Total assets
	  	$	299,764	  	 	$	306,620	  
		  	  
	  
	 	 	  
	  
	 
	 Liabilities and Owner’s Equity
	  				 			
	 Current liabilities:
	  				 			
	 Trade accounts payable
	  	$	474	  	 	$	580	  
	 Accrued expenses (Note 11)
	  	 	1,735	  	 	 	1,830	  
	 Current portion of long-term debt (Notes 8 and 12)
	  	 	19,500	  	 	 	19,500	  
	 Derivative liabilities (Notes 7 and 8)
	  	 	918	  	 	 	—  	 
	 Prepaid charter and deferred revenue (Note 2(p))
	  	 	1,487	  	 	 	1,487	  
	 Payables to owners and affiliates
	  	 	568	  	 	 	7,065	  
	 Other current liabilities
	  	 	—  	 	 	 	—  	 
		  	  
	  
	 	 	  
	  
	 
	 Total current liabilities
	  	 	24,682	  	 	 	30,462	  
		  	  
	  
	 	 	  
	  
	 
	 Long-term liabilities:
	  				 			
	 Long-term debt (Notes 8 and 12)
	  	 	207,188	  	 	 	212,063	  
	 Other long-term liabilities
	  	 	5,144	  	 	 	5,518	  
		  	  
	  
	 	 	  
	  
	 
	 Total liabilities
	  	 	237,014	  	 	 	248,043	  
		  	  
	  
	 	 	  
	  
	 
	 Commitments and contingencies (Notes 2(q) and 15)
	  				 			
	 Equity:
	  				 			
	 Share capital, par value $366.3, 200 shares issued at March 31, 2014 and December 31, 2013
	  	 	73	  	 	 	73	  
	 Share premium
	  	 	43,077	  	 	 	43,077	  
	 Other paid in equity
	  	 	11,229	  	 	 	11,229	  
	 Retained earnings
	  	 	8,371	  	 	 	4,198	  
	 Total equity
	  	 	62,750	  	 	 	58,577	  
		  	  
	  
	 	 	  
	  
	 
	 Total liabilities and equity
	  	$	299,764	  	 	$	306,620	  
		  	  
	  
	 	 	  
	  
	 

 The accompanying notes are an integral part of these financial statements. 

  
 3 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Unaudited Combined Statement of Owner’s Equity 

For the Three Months Ended March 31, 2014 and 2013 

(U.S. Dollars in thousands) 
  

																					
	 	  	Share Capital (1)	 	  	Share
Premium	 	  	Other
Paid-in
Equity	 	  	Retained
Earnings	 	  	Total Equity	 
	 Total equity as of December 31, 2012
	  	$	73	  	  	$	43,077	  	  	$	1,961	  	  	$	1,202	  	  	$	46,313	  
	 Net income for the period
	  	 	—  	 	  	 	—  	  	  	 	—  	  	  	 	313	  	  	 	313	  
	 Group contribution
	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 Total equity as of March 31, 2013
	  	$	73	  	  	$	43,077	  	  	$	1,961	  	  	$	1,515	  	  	$	46,626	  
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  

																					
	 	  	Share Capital (1)	 	  	Share
Premium	 	  	Other
Paid-in
Equity	 	  	Retained
Earnings	 	  	Total Equity	 
	 Total equity as of December 31, 2013
	  	$	73	  	  	$	43,077	  	  	$	11,229	  	  	$	4,198	  	  	$	58,577	  
	 Net income for the period
	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	4,173	  	  	 	4,173	  
	 Group contribution
	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 Total equity as of March 31, 2014
	  	$	73	  	  	$	43,077	  	  	$	11,229	  	  	$	8,371	  	  	$	62,750	  
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  

	(1)	All shares have the same rights in the Companies. 

 The accompanying notes are an integral
part of these financial statements. 

  
 4 

 Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS 

Unaudited Combined Statement of Cash Flows 

For the Three Months Ended 31, 2014 and 2013 

(U.S. Dollars in thousands) 
  

									
	 	  	Three Months Ended
March 31,	 
	 	  	2014	 	 	2013	 
	 Cash flows provided by operating activities:
	  				 			
	 Net income (loss)
	  	$	4,173	  	 	$	313	  
	 Adjustments to reconcile net income (loss) to cash provided by operating activities:
	  				 			
	 Depreciation and amortization
	  	 	2,835	  	 	 	—  	  
	 Amortization of deferred debt issuance cost
	  	 	284	  	 	 	—  	  
	 Unrealized (gain) loss on derivative instruments
	  	 	(632	) 	 			
	 Unrealized (gain) loss on foreign currency transactions
	  	 	5	  	 	 	(491	) 
	 Other items
	  	 	(374	) 	 	 	—  	  
	 Changes in operating assets and liabilities
	  				 			
	 Decrease (increase) in trade accounts receivable
	  	 	3,777	  	 	 	—  	  
	 Decrease (increase) in receivables from owner and affiliates
	  	 	(2,556	) 	 	 	—  	  
	 Decrease (increase) in inventories
	  	 	29	  	 	 	—  	  
	 Decrease (increase) in other current assets
	  	 	(749	) 	 	 	214	  
	 Increase (decrease) in trade accounts payable
	  	 	(106	) 	 	 	915	  
	 Increase (decrease) in payable to owners and affiliates
	  	 	(6,497	) 	 	 	—  	  
	 Increase (decrease) in accrued expenses
	  	 	(95	) 	 	 	1,864	  
	 Increase (decrease) in other liabilities
	  	 	—  	  	 	 	(26	) 
		  	  
	  
	 	 	  
	  
	 
	 Net cash provided by operating activities
	  	 	94	  	 	 	2,789	  
		  	  
	  
	 	 	  
	  
	 
	 Cash flows from investing activities:
	  				 			
	 Disposals (additions) to vessel and equipment
	  	 	(121	) 	 	 	(18,157	) 
		  	  
	  
	 	 	  
	  
	 
	 Net cash used in investing activities
	  	 	(121	) 	 	 	(18,157	) 
		  	  
	  
	 	 	  
	  
	 
	 Cash flows from financing activities:
	  				 			
	 Proceeds from issuance of long-term debt
	  	 	—  	  	 	 	13,012	  
	 Repayment of long-term debt
	  	 	(4,875	) 	 	 	—  	  
	 Payments of debt issuance cost
	  	 	(74	) 	 	 	(472	) 
	 Changes in payables to owners and affiliates
	  	 	—  	  	 	 	2,893	  
		  	  
	  
	 	 	  
	  
	 
	 Net cash provided by (used in) financing activities
	  	 	(4,949	) 	 	 	15,433	  
		  	  
	  
	 	 	  
	  
	 
	 Effect of exchange rate changes on cash
	  	 	(5	) 	 	 	3	  
	 Net increase (decrease) in cash and cash equivalents
	  	 	(4,981	) 	 	 	68	  
	 Cash and cash equivalents at the beginning of the year
	  	 	11,841	  	 	 	228	  
		  	  
	  
	 	 	  
	  
	 
	 Cash and cash equivalents at the end of the year
	  	$	6,860	  	 	$	296	  
		  	  
	  
	 	 	  
	  
	 

 The accompanying notes are an integral part of these financial statements. 

  
 5 

 1) Description of Business 

Knutsen Shuttle Tankers 14 AS and Knutsen Shuttle Tankers 15 AS (hereafter referred as the “Companies”) own the 123,000 DWT Suez-max
shuttle tanker, Hilda Knutsen, and the 123,000 DWT Suez-max shuttle tanker, Torill Knutsen, respectively, delivered from Hyundai Heavy Industries (HHI) Shipyard in South Korea on August 5, 2013 and November 4, 2013. 

Knutsen Shuttle Tankers 14 AS was established on March 25, 2011 to take ownership of one building contract for one 123,000 DWT Suez-max
shuttle tanker, Hilda Knutsen, delivered on August 5, 2013. Knutsen Shuttle Tankers 15 AS was established on June 1, 2011 to take ownership of one building contract for one 123,000 DWT Suez-max shuttle tanker, Torill Knutsen,
delivered on November 4, 2013. Both the Hilda Knutsen and the Torill Knutsen (the “Vessels”) are on time-charter contracts to Eni Trading and Shipping S.p.A. (“Eni”), for operation primarily on the Goliat
offshore oil field outside northern Norway on a five-year time-charter agreement with five one-year-options. In the case of the charter for the Torill Knutsen, Eni has the option, at any time before May 31, 2016, to extend the charter term to
ten years in exchange for a reduction in the hire rate. 
 The Companies are owned by Knutsen NYK Offshore Tankers AS (“KNOT”),
and are operating as an integrated part of KNOT. KNOT is owned 50% by TS Shipping Invest AS (“TSSI”) and 50% by Nippon Yusen Kaisha (“NYK”). Technical and commercial management of the vessels have been subcontracted to Knutsen
OAS Shipping AS (“KOAS”) up to July 1, 2012 and thereafter by KNOT Management AS, a 100% owned subsidiary of KNOT. KOAS is controlled 99% by TSSI. 

There are no employees in the Companies and daily operation is managed by KNOT Management AS. 

2) Summary of Significant Accounting Policies 
 (a)
Basis of Preparation 
 The combined financial statements are prepared in accordance with accounting principles generally accepted in
the United States (“U.S. GAAP”). 
 (b) Reporting Currency 

The combined financial statements are prepared in the reporting currency of U.S. Dollars. The functional currency of the Companies is the
U.S. Dollar, because both entities operate in the international shipping market all revenues are U.S. Dollars denominated and the majority of the expenditures are made in U.S. Dollars. Transactions involving other currencies during the year are
converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. As of the balance sheet dates, monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated to
reflect the year-end exchange rates. Resulting gains and losses are reflected separately in the accompanying combined statements of operations. 
 (c)
Use of Estimates 
 The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives and impairment of Vessels, drydocking, and income taxes. 

(d) Revenues and Operating Expenses 

The Companies recognize revenues from time charters as operating leases on a straight-line basis over the term of the charter, net of any
commissions. Under time charters, revenue is not recognized during days the Vessel is off-hire. Revenue is recognized from delivery of the Vessel to the charterer, until the end of the contract period. Under time charters, the Companies are
responsible for 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. Fees received from customers for customized equipment are deferred and
recognized over the contract period. The Companies recognize revenues from spot contracts as voyage revenues using the percentage of completion method on a discharge-to-discharge basis. 

Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading
expenses, canal tolls and agency fees. Voyage expenses are paid by the customer under time charters. 
 Vessel operating expenses include
crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. Vessel operating expenses are paid by the Companies for time charters and during off-hire and are recognized when incurred. As further discussed in Note
14—Related Party Transactions, related parties have provided the management services for the Vessels and employ the crews that work on the Vessels. The Companies have no direct employees and, accordingly, are not liable for any pension or
post-retirement benefits. 
 (e) Financial Income (Expense) 

Interest expenses incurred on the Companies’ debt incurred during the construction of the Vessels exceeding one year are capitalized
during the construction period. 

  
 6 

 (f) Cash and Cash Equivalents 

The Companies consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 (g) Trade Accounts Receivable 

Accounts receivable are recorded at the invoiced amount and do not bear interest. Under terms of the current time charters, the customers are
committed to pay for the full month’s charter the first day of each month. See Note 2(p) —Summary of Significant Accounting Policies: Prepaid Charter and Deferred Revenue. The allowance for doubtful accounts is the Companies’ best
estimate of the amount of probable credit losses in existing accounts receivable. The Companies establish provisions for doubtful accounts on a case-by-case basis when it is unlikely that required payments of specific amounts will occur. In
establishing these provisions, the Companies consider the financial condition of the customer as well as specific circumstances related to the receivable. Receivable amounts determined to be unrecoverable are written-off. There were no provisions as
allowance for doubtful accounts or amounts written-off against the allowance for doubtful accounts as of March 31, 2014. The Companies do not have any off-balance-sheet credit exposure related to their customers. 

(h) Inventories 
 Inventories,
which are comprised principally of lubricating oils, are stated at the lower of cost or market. For vessels on time charters, there are no bunkers, as the charterer supplies the bunkers, which principally consist of fuel oil. Cost is determined
using the first-in, first-out method for all inventories. 
 (i) Other Current Assets 

Other current assets principally consist of prepaid expenses, the current portion of deferred cost and other receivables. 

(j) Vessels and Equipment 
 Vessels
and equipment are stated at the historical acquisition or construction cost, including capitalized interest, supervision and technical and delivery cost, net of accumulated depreciation and impairment loss, if any. Expenditures for subsequent
conversions and major improvements are capitalized, provided that such costs increase the earnings capacity or improve the efficiency or safety of the vessels. 

Generally, the Companies drydock each vessel every 60 months until the vessel is 15 years old and every 30 months thereafter, as required for
the renewal of certifications issued by classification societies. For vessels operating on time charters, the Companies capitalize the costs directly associated with the classification and regulatory requirements for inspection of the vessels, major
repairs and improvements incurred during drydocking. Drydock cost is amortized on a straight-line basis over the period until the next planned drydocking takes place. The Companies expense costs related to routine repairs and maintenance performed
during drydocking or as otherwise incurred. For vessels that are newly built or acquired, an element of the cost of the vessel is initially allocated to a drydock component and amortized on a straight-line basis over the period until the next
planned drydocking. When significant drydocking expenditures occur prior to the expiration of this period, the Companies expense the remaining unamortized balance of the original drydocking cost in the month of the subsequent drydocking. For vessels
operating on bareboat charters, the charter party bears the cost of any drydocking. 
 Depreciation on vessels and equipment is calculated
on a straight-line basis over the asset’s estimated useful life, less an estimated residual value, as follows: 
  

					
	 	  	Useful Life	 
	 Hull
	  	 	25 years	  
	 Anchor-handling, loading and unloading equipment
	  	 	25 years	  
	 Main/auxiliary engine
	  	 	25 years	  
	 Thruster, dynamic positioning systems, cranes and other equipment
	  	 	25 years	  
	 Drydock costs
	  	 	2.5–5 years	  

 A vessel is depreciated to its estimated residual value, which is calculated based on the weight of the ship
and estimated steel price. Any cost related to the disposal is deducted from the residual value. 
 (k) Capitalized Interest 

Interest expense incurred on the Companies’ debt during the construction of the Vessels exceeding one year is capitalized during the
construction period. 
 (l) Impairment of Long-Lived Assets 

Vessels and equipment, vessels under construction and intangible assets subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Companies first compare undiscounted cash flows
expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying
value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. 

  
 7 

 (m) Debt Issuance Costs 

Debt issuance costs, including fees, commissions and legal expenses, are deferred. Debt issuance costs of term loans are amortized over the
term of the relevant loan. Amortization of debt issuance costs is included in interest expense. 
 (n) Derivative Instruments 

All derivative instruments are initially recorded at fair value as either assets or liabilities in the accompanying combined balance sheets and
subsequently measured to fair value. The Companies do not apply hedge accounting to their derivative instruments. Changes in the fair value of the derivative instruments are recognized in earnings. Gains and losses from the interest rate swap
contracts of the Companies related to long-term mortgage debt are recorded in realized and unrealized gain (loss) on derivative instruments in the combined statements of operations. Cash flows related to interest rate swap contracts are presented as
cash flows provided by operating activities in the combined statements of cash flows. 
 (o) Income Taxes 

The tax expense in the income statement includes both tax payable and changes in deferred tax. Deferred tax is calculated at 28% on the basis
of temporary differences between accounting and tax values and tax loss carried forward at the year end. Tax increasing and tax reducing temporary differences which reverse or may be reversed in the same period are assessed and netted. The Companies
are subject to the Norwegian Tonnage Tax regime (“the tonnage tax regime”). Under the tonnage tax regime, the tax is based on the tonnage of the vessel and the 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. Tonnage tax is classified as an operating expense. To be within the scheme the Companies should meet certain requirements, such as only ownership of ship/ shares in the
shipping companies, and only own certain types of financial assets. 
 (p) Prepaid Charter and Deferred Revenue 

Under terms of the time charters, the customer pays for the month’s charter the first day of each month and that is recorded as prepaid
charter revenues. Deferred revenues for fees received from customers for customized equipment are classified as prepaid charter and deferred revenue for the current portion and as other long-term liabilities for the non-current portion. 

(q) Commitments, Contingencies and Insurance Proceeds 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. See Note 15—Commitments and Contingencies. 

Insurance claims for property damage for recoveries up to the amount of loss recognized are recorded when the claims submitted to insurance
carriers are probable of recovery. Claims for property damage in excess of the loss recognized and for loss off-hire are considered gain contingencies, which are generally recognized when the proceeds are received. 

(r) Fair Value Measurements 
 The
Companies utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Companies determines fair value based on assumptions that market participants would use in
pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs,
which are categorized in one of the following levels: 
  

	 	•	 	Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. 

 

	 	•	 	Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or
liability. 

  

	 	•	 	Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if
any, market activity for the asset or liability at the measurement date. 

 (s) Recently Issued Accounting Standards 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair
Value measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The new standards do not extend the use of fair value but, rather, provide guidance
about how fair value should be applied where it already is required or permitted under International Financial Reporting Standards (“IFRS”) or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording
changes to align with IFRS. A public entity is required to apply ASC 2011-04 prospectively for interim and annual periods beginning after December 5, 2011. The adoption of ASU 2011-04 did not have a material impact on the Companies’
combined financial statements. 

  
 8 

 In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures
about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those
arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning
January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Companies adopted the provisions of ASU 2011-11 as of January 1, 2013. The adoption of ASU 2011-11 did not have a material impact
on the Companies’ combined financial statements. 
 In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires reporting and disclosure about changes in accumulated other comprehensive income (“AOCI”) balances and reclassifications out of
AOCI. For public companies, the ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Companies’ combined
financial statements. 
 There are no recent accounting pronouncements issued whose adoption would have a material impact on the
Companies’ financial statements in the current year or are expected to have a material impact on future years. 
 3) Significant Risks and
Uncertainties Including Business and Credit Concentrations 
 Each of the Vessels is currently employed under long-term fixed charters,
which mitigates earnings risk. The Companies’ operational results are dependent on the worldwide market for shuttle tankers and timing of entrance into long-term charters. Market conditions for shipping activities are typically volatile, and,
as a consequence, the hire rates may vary from year to year. The market is mainly dependent upon two factors: the supply of vessels and the overall growth in the world economy. The general supply of vessels is a combination of newbuilds, demolition
activity of older vessels and legislation that limits the use of older vessels or new standards for vessels used in specific trades. 
 The
Companies did not incur any loss relating to their customers during the three months ended March 31, 2014. The following table presents revenues and percentage of combined revenues for customers that accounted for more than 10% of the combined
revenues during the three months ended March 31, 2014 and 2013. 
  

																	
	 	  	Three Months Ended March 31,	 
	 (U.S. Dollars in thousands)
	  	2014	 	 	2013	 
	 Eni Trading and Shipping S.p.A
	  	$	11,372	  	  	 	100	%	 	$	—  	  	  	 	0	%

 The Companies have financial assets that expose them to credit risk arising from possible default by a
counterparty. The Companies consider their counterparties to be creditworthy financial institutions and do not expect any significant loss to result from non-performance by such counterparties. The maximum loss due to credit risk that the Companies
would incur if counterparties failed completely to perform would be the carrying value of cash and cash equivalents and trade accounts receivable. The Companies, in the normal course of business, do not demand collateral from their counterparties.

 4) Operating Leases 
 The time
charters of the vessels with third parties are accounted for as operating leases. The minimum contractual future revenues to be received from time charters as of March 31, 2014, were as follows: 

 

					
	(U.S. Dollars in thousands)	  	 	 
	 2014 as of March 31, 2014
	  	$	33,506	  
	 2015
	  	 	44,472	  
	 2016
	  	 	44,472	  
	 2017
	  	 	44,472	  
	 2018
	  	 	32,188	  
	 2019 and thereafter
	  	 	0	  
		  	  
	  
	 
	 Total
	  	$	199,110	  
		  	  
	  
	 

  

	 	•	 	Knutsen Shuttle Tanker 14 AS owns the vessel, Hilda Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in August 2018, with Eni, with five one-year-options to
extend until August 2023. 

  

	 	•	 	Knutsen Shuttle Tanker 15 AS owns the vessel, Torill Knutsen, a shuttle tanker built in 2013 that is currently operating under a time charter that expires in November 2018, with Eni, with five one-year-options to
extend until November 2023. In the case of the charter for the Torill Knutsen, Eni has the option, at any time before May 31, 2016, to extend the charter term to ten years in exchange for a reduction in the hire rate. 

  
 9 

 5) Segment Information 

The Companies have not presented segment information as they consider their operations to occur in one reportable segment, the shuttle tanker
market. In time charters, the charterer, not the Companies, controls the choice of which trading areas the vessel will serve. Accordingly, the Companies’ management, including the chief operating decision makers, does not evaluate performance
according to geographical region. 
 For the three month ended period as of March 31, 2014, the vessels operated under two charters.
See Note 3- Significant Risks and Uncertainties Including Business and Credit Concentrations for revenues from customers accounting for over 10% of the combined revenue. In both time charters, the charterer controls the choice of which trading areas
the Vessels will serve. Accordingly, the Companies’ management, including the chief decision makers, do not evaluate performance according to geographical region. 

6) Finance Income (Expense) 
 (a) Interest Expense

 A reconciliation of total interest cost to interest expense as reported in the statement of operations for the three months ended
March 31, 2014 and 2013 is as follows: 
  

									
	 	  	Three Months Ended
March 31,	 
	(U.S. Dollars in thousands)	  	2014	 	  	2013	 
	 Interest cost capitalized
	  	$	—  	 	  	$	871	  
	 Interest expense
	  	 	1,979	  	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Total interest cost
	  	$	1,979	  	  	$	871	  
		  	  
	  
	 	  	  
	  
	 

 (b) Other Finance Expense 

The following table presents the other finance expense for the three months ended March 31, 2014 and 2013: 

 

									
	 	  	Three Months Ended
March 31,	 
	(U.S. Dollars in thousands)	  	2014	 	 	2013	 
	 Bank fees, charges and external guarantee costs
	  	$	(6	)	 	$	20	  
	 Related party guarantee commission
	  	 	287	  	 	 	129	  
		  	  
	  
	 	 	  
	  
	 
	 Total other finance expense
	  	$	281	  	 	$	148	  
		  	  
	  
	 	 	  
	  
	 

 7) Derivative Instruments 

Interest Rate Risk Management 
 In
February 2014, the Companies entered into interest rate swap agreements effective from July, 2014 and until July 2018, for a total notional amount of $100 million to hedge against the interest rate risks of their variable rate borrowings. Under the
terms of the interest rate swap agreements, the Companies will receive from the counterparty interest on the notional amount based on three-month LIBOR and will pay to the counterparty a fixed rate. For the interest rate swap agreements above, the
Companies will pay to the counterparty a fixed rate of 1.455%. 
 The combined financial statements include the results of interest rate
swap contracts to manage the Companies’ exposure related to changes in interest rates on its variable rate debt instruments. The Companies does not apply hedge accounting for derivative instruments. The Companies do not speculate using
derivative instruments. 
 By using derivative financial instruments to economically hedge exposures to changes in interest rates, the
Companies expose 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 Companies, which creates credit risk for the Companies. When the fair value of
a derivative instrument is negative, the Companies owe the counterparty, and, therefore, the Companies are not exposed to the counterparty’s credit risk in those circumstances. The Companies minimizes counterparty credit risk in derivative
instruments by entering into transactions with major banking and financial institutions. The derivative instruments entered into by the Companies do not contain credit risk-related contingent features. 

  
 10 

 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 Companies 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 variable interest rate mortgage debt obligations expose the
Companies to variability in interest payments due to changes in interest rates. The Companies believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Companies 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 Companies receive LIBOR-based variable interest rate payments and make fixed interest rate payments, thereby creating the equivalent of fixed
rate debt for the notional amount of their debt hedged. 
 As of March 31, 2014, the total notional amount of the Companies outstanding
interest rate swap contracts that were entered into in order to hedge outstanding or forecasted debt obligations were $100 million. As of March 31, 2014, the carrying amount of the interest rate swaps contracts were net assets of $0.7 million.
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 Companies did not
have any interest rate swap agreements as of March 31, 2013. 
 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 months ended March 31, 2014 and 2013. 
  

									
	 	  	Three Months Ended
March 31,	 
	(U.S. Dollars in thousands)	  	2014	 	  	2013	 
	 Realized gain (loss)
	  				  			
	 Interest rate swap contracts
	  	$	—  	 	  	$	—  	 
	 Unrealized gain (loss)
	  				  			
	 Interest rate swap contracts
	  	 	632	  	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	632	  	  	$	—  	 
		  	  
	  
	 	  	  
	  
	 

 8) Fair Value Measurements 

(a) Fair Value of Financial Instruments 

The following table presents the carrying amounts and estimated fair values of the Companies’ financial instruments as of March 31,
2014 and 2013. 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. 

 

																	
	 	  	March 31, 2014	 	  	December 31, 2013	 
	(U.S. Dollars in thousands)	  	Carrying
Amount	 	  	Fair Value	 	  	Carrying
Amount	 	  	Fair Value	 
	 Financial assets:
	  				  				  				  			
	 Cash and cash equivalents
	  	$	6,860	  	  	$	6,860	  	  	$	11,841	  	  	$	11,841	  
	 Restricted cash
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Non-current derivative assets:
	  				  				  				  			
	 Interest rate swap contracts
	  	 	1,550	  	  	 	1,550 	  	  				  			
	 Financial liabilities:
	  				  				  				  			
	 Long-term debt, current and non-current
	  	 	226,688	  	  	 	227,926	  	  	 	231,563	  	  	 	232,894	  
	 Current derivative liabilities:
	  				  				  				  			
	 Interest rate swap contracts
	  	 	918	  	  	 	918	  	  	 	—  	 	  	 	—  	 

  
 11 

 The carrying amounts shown in the table above are included in the Companies’ balance sheets
under the indicated captions. 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 March 31, 2014 and December 31, 2013 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 Companies’ own judgment about the assumptions that market participants would use in pricing
the asset or liability. Those judgments are developed by the Companies 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: The fair value of the Companies’ cash balances approximates the carrying amounts due to the current nature of the amounts. 

 

	•	 	Interest rate swap contracts: The fair value of interest-rate swaps is determined using an income approach using the following significant inputs: the term of the swap, the notional amount of the swap, discount
rates interpolated based on relevant LIBOR swap curves and the rate on the fixed leg of the swap. 

  

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

 (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 March 31, 2014 and December 31, 2013: 

 

																	
	 	  	 	 	  	Fair Value Measurements at
Reporting Date Using	 
	(U.S. Dollars in thousands)	  	March 31,
2014	 	  	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
	  	$	6,860	  	  	$	6,860	  	  	$	—  	 	  	$	—  	 
	 Non-current derivative assets:
	  				  				  				  			
	 Interest rate swap contracts
	  	 	1,550 	  	  	 	—  	 	  	 	1,550 	  	  	 	—  	 
	 Financial liabilities:
	  				  				  				  			
	 Current derivative liabilities:
	  				  				  				  			
	 Interest rate swap contracts
	  	 	918	  	  				  	 	918	  	  			
	 Long-term debt, current and non-current
	  	 	227,926	  	  	 	—  	 	  	 	227,926	  	  	 	—  	 
			
	 	  	 	 	  	Fair Value Measurements at
Reporting Date Using	 
	(U.S. Dollars in thousands)	  	December 31,
2013	 	  	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
	  	$	11,841	  	  	$	11,841	  	  	$	—  	 	  	$	—  	 
	 Non-current derivative assets:
	  				  				  				  			
	 Interest rate swap contracts
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Financial liabilities:
	  				  				  				  			
	 Current derivative liabilities:
	  				  				  				  			
	 Interest rate swap contracts
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Long-term debt, current and non-current
	  	 	232,894	  	  	 	—  	 	  	 	232,894	  	  	 	—  	 

  
 12 

 The Companies’ 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 March 31, 2014 and December 31, 2013. 

9) Trade Accounts Receivables 
 (a) Trade Accounts
Receivables 
 Trade accounts receivable are presented net of provisions for doubtful accounts. As of March 31, 2014 and
December 2013, there was no provision for doubtful accounts. 
 (b) Other Current Assets 

Other current assets consist of the following: 
  

									
	(U.S. Dollars in thousands)	  	At March 31,
2014	 	  	At December 31,
2013	 
	 Refund of value added tax
	  	$	27	  	  	$	88	  
	 Prepaid expenses
	  	 	157	  	  	 	43	  
	 Current portion of deferred debt issuance cost
	  	 	1,139	  	  	 	1,120	  
	 Other receivable
	  	 	1,086	  	  	 	390	  
		  	  
	  
	 	  	  
	  
	 
	 Total other current assets
	  	$	2,409	  	  	$	1,641	  
		  	  
	  
	 	  	  
	  
	 

 10) Vessels and Equipment 
  

																	
	(U.S. Dollars in thousands)	  	Vessels &
equipment	 	  	Vessels under
construction	 	 	Accumulated
depreciation	 	 	Net vessels	 
	 Balance December 31, 2012
	  	$	—  	  	  	 	126,663	 	 	$	—  	  	 	$	126,663	 
	 Additions
	  	 	—  	  	  	 	155,823	  	 	 	—  	  	 	 	155,823	  
	 Drydock costs
	  	 	5,000	  	  	 	—  	  	 	 	—  	  	 	 	5,000	  
	 Transfer from vessels under construction
	  	 	282,486	  	  	 	(282,486	)	 	 	—  	  	 	 	—  	  
	 Disposal
	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	—  	  
	 Depreciation
	  	 	—  	  	  	 	—  	  	 	 	(3,303	)	 	 	(3,303	)
	 Balance December 31, 2013
	  	$	287,486	  	  	$	—  	  	 	$	(3,303	)	 	$	284,183	  
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Additions
	  	 	121	  	  	 	—  	  	 	 	—  	  	 	 	121	  
	 Drydock costs
	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	—  	  
	 Transfer from vessels under construction
	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	—  	  
	 Disposal
	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	—  	  
	 Depreciation
	  	 	—  	  	  	 	—  	  	 	 	(2,835	)	 	 	(2,835	)
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 
	 Balance March 31, 2014
	  	$	287,607	  	  	 	—  	  	 	$	(6,138	)	 	$	281,469	  
		  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 

 As of March 31, 2014, Vessels with a book value of $281.5 million are pledged as security held as a
guarantee for the Companies’ long-term debt. See Note 12—Long-Term Debt. 
 Drydocking activity for the three months ended
March 31, 2014 is summarized as follows: 
  

									
	(U.S. Dollars in thousands)	  	At March 31,
2014	 	 	At December 31,
2013	 
	 Balance at the beginning of the year
	  	$	4,709	  	 	$	—  	  
	 Costs incurred for drydocking
	  	 	—  	  	 	 	5,000	  
	 Drydock amortization
	  	 	(250	) 	 	 	(291	)
		  	  
	  
	 	 	  
	  
	 
	 Balance at the end of the year
	  	$	4,459	  	 	$	4,709	  
		  	  
	  
	 	 	  
	  
	 

  
 13 

 11) Accrued Expenses 

The following table presents accrued expenses as of March 31, 2014: 

 

									
	(U.S. Dollars in thousands)	  	At March 31,
2014	 	  	At December 31,
2013	 
	 Operating expenses
	  	$	585	 	  	$	670	  
	 Interest expenses
	  	 	1,150	  	  	 	1,160	  
		  	  
	  
	 	  	  
	  
	 
	 Total accrued expenses
	  	$	1,735	  	  	$	1,830	  
		  	  
	  
	 	  	  
	  
	 

 12) Long-Term Debt 

Long-term debt as of March 31, 2014 and December 31, 2013 consisted of following: 

 

													
	(U.S. Dollars in thousands)	  	Vessel	 	  	March 31,
2014	 	  	December 31,
2013	 
	 $117 million Loan facility
	  	 	Hilda Knutsen	  	  	$	112,125	  	  	$	114,563	  
	 $117 million Loan facility
	  	 	Torill Knutsen	  	  	 	114,563	  	  	 	117,000	  
		  				  	  
	  
	 	  	  
	  
	 
	 Total long-term debt
	  				  	 	226,688	  	  	 	231,563	  
	 Less current installments
	  				  	 	19,500	  	  	 	19,500	  
		  				  	  
	  
	 	  	  
	  
	 
	 Long-term debt, excluding current
	  				  	$	207,188	  	  	$	212,063	  
		  				  	  
	  
	 	  	  
	  
	 

 Hilda Facility 

The $117 million secured loan facility (the “Hilda Facility”) is repayable in quarterly installments over five years with a final
balloon payment due at maturity in August 2018. The Hilda Facility bears interest at LIBOR plus a fixed margin of 2.5%. 
 The Hilda
Knutsen, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Hilda Facility. KNOT is the sole guarantor. 

The Hilda Facility contains the following financial covenants: 
  

	 	•	 	Market value of the Hilda Knutsen to be no less than 100% of the outstanding balance under the Hilda Facility for the first 4 years and 125% for the 5th year;

  

	 	•	 	Positive working capital of the borrower and of KNOT and its subsidiaries on a consolidated basis (“KNOT Group”); 

  

	 	•	 	Minimum liquidity of (i) $2 million for the borrower; (ii) $25 million for the guarantor, and (iii) 4% of interest bearing debt for the KNOT Group; 

 

	 	•	 	Minimum book equity ratio for the KNOT Group of 22.5 % until December 31, 2014, and thereafter 25%; and 

  

	 	•	 	EBITDA must exceed interest payable, any amounts payable for the interest rate swaps and debt installments for the KNOT Group calculated on a four quarter rolling basis. 

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. 
 The borrower and the guarantor were in compliance with all covenants as
of March 31, 2014, and December 31, 2013. 

  
 14 

 Torill Facility 

The $117 million secured loan facility (the “Torill Facility”) is repayable in quarterly installments over five years with a final
balloon payment due at maturity in November 2018. The Torill Facility bears interest at LIBOR plus a fixed margin of 2.75%. 
 The Torill
Knutsen, assignments of earnings, charterparty contracts and insurance proceeds are pledged as collateral for the Hilda Facility. Knutsen NYK Offshore Tankers AS is the sole guarantor. 

The Torill Facility contains the following financial covenants: 
  

	 	•	 	Market value of the Torill Knutsen to be no less than 100% of the outstanding balance under the Torill Facility for the first 4 years and 125% for the 5th
year; 

  

	 	•	 	Positive working capital of the borrower and KNOT Group; 

  

	 	•	 	Minimum liquidity of (i) $2 million for the borrower; (ii) $25 million for the guarantor, and (iii) 4% of interest bearing debt for the KNOT Group; 

 

	 	•	 	Minimum book equity ratio for the KNOT Group of 22.5 % until December 31, 2014, and thereafter 25%; and 

  

	 	•	 	EBITDA must exceed interest payable, any amounts payable for the interest rate swaps and debt installments for the KNOT Group calculated on a four quarter rolling basis. 

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. 
 The borrower and the guarantor were in compliance with all
covenants as of March 31, 2014, and December 31, 2013. 
 The total outstanding debt as of March 31, 2014 is repayable as
follows: 
  

					
	(US $ in thousands)	  	 	 
	 2014
	  	$	14,625	  
	 2015
	  	 	19,500	  
	 2016
	  	 	19,500	  
	 2017
	  	 	19,500	  
	 2018 and thereafter
	  	 	153,563	  
	 Total
	  	$	226,688	  

 13) Income Taxes 

Components of Current and Deferred Tax Expense (Benefit) 

The Companies are subject to the Norwegian Tonnage Tax regime (“the tonnage tax regime”). Under the tonnage tax regime, the tax is
based on the tonnage of the vessel and the 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. Tonnage tax is classified as an operating expense.
Tonnage tax amounted to $11,000 in the three months ended March 31, 2014, and $0 in the three months ended March 31, 2013. 
  

									
	 	  	Three Months Ended
March 31,	 
	(US $ in thousands)	  	2014	 	 	2013	 
	 Income (loss) before income taxes
	  	$	4,173	  	 	$	313	  
	 Income tax expense (benefit)
	  	 	—  	 	 	 	—  	 
	 Effective tax rate
	  	 	0	% 	 	 	0	% 

 A valuation allowance for deferred tax assets is recorded when it is more likely than not that some of or all
of the benefit from the deferred tax asset will not be realized. The valuation allowances relate to the financial loss carry forwards and other deferred tax assets for tonnage tax that, in the judgment of the Companies, are more-likely-than not to
be realized reflecting the Companies’ cumulative loss position for tonnage tax. In assessing the realizability of deferred tax assets, the Companies consider 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, and there is no deferred tax assets recognized as of March 31, 2014 and December 31, 2013. 

  
 15 

 14) Related Party Transactions 

(a) Related Parties 
 The Companies
have been charged by KNOT and KOAS for commercial services related to the charters, technical and operational support related to the operation of the Vessels, certain administrative costs and finance fees. 

The amounts of such costs and expenses included in the combined statements of operations for the three month ended March 31, 2014 and
2013 is as follows: 
  

									
	 	  	Three Months Ended
March 31,	 
	(U.S. Dollars in thousands)	  	2014	 	  	2013	 
	 Statements of operations:
	  				  			
	 Time charter revenues:
	  				  			
	 Commercial commission fee from KNOT to Vessels (1)
	  	$	141	  	  	$	—  	  
	 Operating expenses:
	  				  			
	 Technical and operational management fee from KOAS and KNOT to Vessels (2)
	  	 	219	  	  	 	—  	  
	 General and administrative expenses:
	  				  			
	 Administration fee from KNOT (3)
	  	 	8	  	  	 	15	  
	 Accounting service fee from KNOT (4)
	  	 	7	  	  	 	7	  
	 Finance expense:
	  				  			
	 Interest expense charged from KNOT (5)
	  	 	64	  	  	 	—  	  
	 Guarantee commission from KNOT to Vessels (6)
	  	 	287	  	  	 	129	  
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	726	  	  	$	151	  
		  	  
	  
	 	  	  
	  
	 
			
	(U.S. Dollars in thousands)	  	At March 31,
2014	 	  	At December 31,
2013	 
	 Balance sheets:
	  				  			
	 Vessels:
	  				  			
	 New building supervision fee from KOAS to Vessels (7)
	  	$	—  	  	  	$	2,350	  
	 Licensing of technology fees from TSSI to Vessels (8)
	  	 	—  	  	  	 	1,080	  
	 Interest capitalized charged from KNOT to subsidiaries (9)
	  	 	—  	  	  	 	395	  
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	—  	  	  	$	3,825	  
		  	  
	  
	 	  	  
	  
	 

  

	(1)	Commercial commission fee from KNOT to Vessels: KNOT provides commercial services related to negotiating and maintaining the charters. KNOT invoices a fixed percentage of revenue as a commercial commission fee
for these services. 

	(2)	Technical and operational management fee from KOAS and KNOT to Vessels: KNOT provides technical and operational management of the vessels on time charter including crewing, purchasing, maintenance and other
operational, bookkeeping and administrative support. 

	(3)	Administration fee from KNOT: Administration costs include the compensation and benefits of KNOT management and administrative staff as well as other general and administration expenses. Net administration costs
are total administration cost plus a 5% margin, reduced for the total fees for services delivered by the administration staffs (the accounting service fees (see (4) below), the financing service fees (see (6) below) 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. 

	(4)	Accounting service fee from KNOT: KNOT invoiced each subsidiary a fixed fee for the preparation of the statutory financial statements. 

	(5)	Interest expense charged from, interest income charged to KNOT: KNOT invoiced interest expense (income) for any outstanding payables to (receivable from) owners and affiliates to the vessel-owning subsidiaries.
Interest expense has been allocated based upon the allocated payables to owners and affiliates and the historical interest rates charged. 

	(6)	Guarantee commission from KNOT to Vessels: KNOT was a guarantor for the Companies’ loan facilities (see Note 12—Long-term Debt and Note 14(b)—Related Party Transactions: Guarantees). KNOT invoiced
an annual commission to each of the Vessels as a fixed percentage of the outstanding balance as compensation for the guarantee. 

	(7)	New building supervision fee from KOAS to Vessels: KOAS charges a fixed fee for supervision of each vessel under construction that is invoiced on a straight-line basis over the period of construction. Such fees,
along with direct and incremental supervision costs incurred, are capitalized as part of the Vessels under construction. 

	(8)	Knutsen Ballast Water Treatment installation from TSSI to Vessel: TSSI has developed Knutsen ballast water treatment technology and the system was installed during the construction and all cost is capitalized as
part of the Vessels under construction. 

	(9)	Interest capitalized charged from KNOT to Vessels: KNOT invoiced interest expense for outstanding payables to owners and affiliates to the vessel owning subsidiaries as explained in (5) above. Such interest
expense is capitalized for qualifying Vessels under construction. 

 (b) Guarantees 

As of March 31, 2014, KNOT is guarantor for the Hilda Facility and Torill Facility. 

  
 16 

 (c) Transaction with Management 

The Companies had no personnel during the three months ended March 31, 2014. There has been no direct remuneration to any members of the
Board of Directors of KNOT. Trygve Seglem, the President and CEO of KNOT has received $119,000 in salary from KNOT Management AS during the three months ended March 31, 2014. He also controls Seglem Holding AS, which has a 100% equity interest
of TSSI, which controls KOAS. TSSI owns 50% in KNOT. Trygve Seglem owns 70% of the equity interests in Seglem Holding AS, and each of his daughters, Synnøve Seglem and Jorunn Seglem, each own 15% of the equity interests. 

NYK, which own 50% of KNOT, has management and administrative personnel on secondment to KNOT starting in March 2011. The cost for such
services was $0.8 million during the three months ended March 31, 2014. NYK has no other related party transactions with KNOT apart from interest income on financing offered to KNOT. 

See this Note 14 – Related Party Transactions Items 3 and 4 for discussion of the allocation principles for KNOT’s administrative
costs, including management and administrative staff, included in the combined statements of operations for the two entities. 
 (d) Amounts Due from
(to) Related Parties 
 Balances with related parties consisted of the following: 

 

									
	(U.S. Dollars in thousands)	  	At March 31,
2014	 	  	At December 31,
2013	 
	 Balance Sheets:
	  				  			
	 Trading balances due from KOAS
	  	$	107	  	  	$	—  	 
	 Trading balances due from KNOT and affiliates
	  	 	3,224	  	  	 	775	  
		  	  
	  
	 	  	  
	  
	 
	 Amount due from related parties
	  	$	3,331	  	  	$	775	  
		  	  
	  
	 	  	  
	  
	 
	 Trading balances due to KOAS
	  	$	18	  	  	$	143	  
	 Trading balances due to KNOT and affiliates
	  	 	550	  	  	 	6,922	  
		  	  
	  
	 	  	  
	  
	 
	 Amount due to related parties
	  	$	568	  	  	$	7,065	  
		  	  
	  
	 	  	  
	  
	 

 Amounts due from (to) related parties are unsecured and intended to be settled in the ordinary course of
business. They primarily relate to vessel management and other fees due to KNOT and KOAS. 
 15) Commitments and Contingencies 

Assets Pledged 
 As of
March 31, 2014, Vessels with a book value of $ 281.5 million were pledged as security held as guarantee for the Companies’ long-term debt and interest rate obligations. See Note 7 – Derivative Instruments and Note
12—Long-Term Debt. 
 Insurance 

The Companies maintain insurance to insure against marine and war risks, which include damage to or total loss of the Vessels, subject to
deductible amounts that average $0.150 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 Companies maintain
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 Companies may be required to pay amounts above budgeted premiums if the member claims exceed
association reserves, subject to certain reinsured amounts. If the Companies experience 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 Companies’ results of operations and financial condition. 

  
 17EX-4.8

 Exhibit 4.8 

Execution Version 

GUARANTY AGREEMENT 
 This
Guaranty Agreement (the “Guaranty”) is made as of March 1, 2013, jointly and severally by and between each of the undersigned (each, a “Guarantor,” and collectively, together with any additional parties that from time to
time may become a Guarantor pursuant to the terms of the Financing Agreement described below, the “Guarantors”), as guarantors, and U.S. BANK NATIONAL ASSOCIATION, as trustee under the Indenture (defined below) (in such
capacity, together with any successor or successors in such capacity, herein called the “Trustee”): 
 W I T N E S S E T H:

 The Vermont Economic Development Authority (the “Authority”) is issuing its Solid Waste Disposal Revenue Bonds (Casella
Waste Systems, Inc. Project) Series 2013, in the aggregate principal amount of $16,000,000 (the “Bonds”) under and pursuant to an Indenture dated as of March 1, 2013 (as supplemented and amended, the “Indenture”) between the
Authority and the Trustee. The proceeds of the Bonds will be loaned by the Authority to Casella Waste Systems, Inc. (the “Company”) pursuant to the terms of a Financing Agreement dated as of March 1, 2013 (as supplemented and amended,
the “Financing Agreement”) between the Authority and the Company. Each Guarantor is a subsidiary of the Company. 
 As used
herein, the following capitalized terms have the meanings set forth below: 
 “Affiliate” of any specified Person means any other
Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. 

“Capital Stock” means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business
entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or
limited); and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. 

“Person” means an individual, partnership, corporation, limited liability company, firm, association, joint stock company,
unincorporated organization, trust, bank, trust company, land trust, business trust or other enterprise or joint venture, or a governmental agency or political subdivision thereof or other entity. 

“Subsidiary” means, with respect to any Person: 

(a) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and 

  
 1 

 (b) any partnership (i) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (ii) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). All other capitalized terms not otherwise
defined herein shall have the same meanings as set forth in the Indenture and the Financing Agreement. 
 NOW, THEREFORE, in
consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the Guarantors agrees as follows: 

 

	 	Section 1.	Unconditional Guarantee. 

 Subject to the provisions of this Section 1, each of the
Guarantors hereby unconditionally and irrevocably guarantees to the Trustee for the benefit of the Holders, irrespective of the validity and enforceability of the Financing Agreement or the obligations of the Company or any other Guarantors to the
Trustee hereunder or thereunder: (a) the principal of and redemption premium, if any, on the Bonds when and as the same shall become due (whether at maturity, by acceleration, call for redemption or otherwise); (b) the interest on the
Bonds when and as the same shall become due; (c) the purchase price of Bonds tendered or deemed tendered for purchase pursuant to Sections 4.6, 4.8 or 4.9 of the Indenture; and (d) all amounts allocable to the Bonds due or to become due
from the Company under Sections 4.2(a) and 4.2(b) of the Financing Agreement (collectively, the “Guaranteed Obligations”). Failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Company
under the Bonds, each Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. An Event of Default under the Financing Agreement with respect to the Bonds shall constitute an event of default under this
Guaranty, and shall entitle the Trustee to accelerate the obligations of the Guarantors hereunder in the same manner and to the same extent as the obligations of the Company under the Financing Agreement. 

Each of the Guarantors hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or
enforceability of the Financing Agreement, the absence of any action to enforce the same, any release of any other Guarantor, the recovery of any judgment against the Company, any action to enforce the same, whether or not this Guaranty is affixed
to the Financing Agreement or the Bonds, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of such Guarantor. Each Guarantor hereby waives the benefit of diligence, presentment, demand of payment,
filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Guaranty shall not be discharged
except by complete performance of the Guaranteed Obligations. This Guaranty is a guarantee of payment and not of collection. If the Trustee is required by any court or otherwise to return to the Company or to a Guarantor, or any custodian, trustee,
liquidator or other similar official acting in relation to the Company or a Guarantor, any amount paid by the Company or a Guarantor to the Trustee, this Guaranty, to the extent theretofore discharged, shall be reinstated in full force and effect,
subject to Section 7 hereof. Each Guarantor further agrees that, as between it, on the one hand, and the Trustee, on the other hand, (a) subject to the other provisions of this Guaranty, the maturity of the Bonds may be accelerated as
provided in Section 7.2 of the Financing Agreement for the purposes of 

  
 -2- 

 
this Guaranty, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Bonds, and (b) in the event of any acceleration of the Bonds as
provided in Section 7.2 of the Financing Agreement, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purpose of this Guaranty. 

Each Guarantor agrees to make immediate payment to the Trustee of all Guaranteed Obligations owing or payable to Trustee upon receipt of a
demand for payment therefor by the Trustee to the Guarantor in writing 
  

	 	Section 2.	Guaranteed Obligations Absolute and Continuing. 

 Subject to Section 7 hereof, the
obligations of each Guarantor hereunder are and shall be absolute and unconditional and any monies or amounts expressed to be owing or payable by each Guarantor hereunder which may not be recoverable from such Guarantor on the basis of this Guaranty
shall be recoverable from such Guarantor as a primary obligor and principal debtor in respect thereof. Subject to Section 7 hereof, the obligations of each Guarantor hereunder shall be continuing and shall remain in full force and effect until
the entire principal of, redemption premium, if any, and interest on or purchase price of the Bonds shall have been paid or provided for according to the terms of the Indenture and all other Guaranteed Obligations have been paid and satisfied in
full. Each Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of this continued liability hereunder in such form as counsel to the Trustee may advise and as will prevent any action
brought against it in respect of any default hereunder being barred by any statute of limitations now or hereafter in force and, in the event of the failure of such Guarantor so to do, it hereby irrevocably appoints the Trustee agent of such
Guarantor to make, execute and deliver such written acknowledgment or acknowledgments or other instruments as may from time to time become necessary or advisable, in the judgment of the Trustee on the advice of counsel, to fully maintain and keep in
force the liability of such Guarantor hereunder. 
  

	 	Section 3.	Limitation on Guarantor Liability. 

 Each of the Guarantors and the Trustee hereby
confirms that it is the intention of each such party that this Guaranty not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar
federal or state law to the extent applicable to this Guaranty. To effectuate the foregoing intention, the Trustee and each Guarantor hereby irrevocably agree that the obligations of the Guarantors under this Guaranty shall be limited to the maximum
amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantors that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or
payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under this Guaranty, result in the obligations of the Guarantors under this Guaranty not constituting a fraudulent transfer or conveyance.

  
 -3- 

	 	Section 4.	Execution and Delivery of Guaranty. 

 This Guaranty shall be executed on behalf of each
Guarantor by either manual or facsimile signature of one officer of the Guarantor or other person duly authorized by all necessary corporate action of the Guarantor who shall have been duly authorized to so execute by all requisite corporate action.
Each Guarantor hereby agrees that this Guaranty, as set forth in Section 1, shall remain in full force and effect notwithstanding any lack of endorsement on the Financing Agreement or the Bonds of a notation of this Guaranty. 

 

	 	Section 5.	Waiver. 

 Without in any way limiting the provisions of Section 1, each Guarantor
hereby waives notice of acceptance hereof, notice of any liability of the Guarantor hereunder, notice or proof of reliance by the Holders upon the obligations of the Guarantor hereunder, and diligence, presentment, demand for payment on the Company,
protest, notice of dishonor or nonpayment of any of the Guaranteed Obligations, or other notice or formalities to the Company or the Guarantor of any kind whatsoever. 
  

	 	Section 6.	No Set-Off. 

 Each payment to be made by the Guarantors hereunder in respect of the
Guaranteed Obligations shall be payable in the currency or currencies in which such Guaranteed Obligations are denominated, and shall be made without set-off, counterclaim, reduction or diminution of any kind or nature. It is the intention of the
parties that the Authority, its members, officers, officials, agents and employees shall not incur pecuniary liability by reason of the terms of this Guaranty, the Financing Agreement or the Indenture, or by reason of the undertakings required of
the Authority, its members, officers, officials, agents and employees in connection with this Guaranty, the Financing Agreement or the Indenture, the performance of any act required or requested of the Authority, its members, officers, officials,
agents and employees in connection with the issuance of the Bonds, this Guaranty, the Financing Agreement or the Indenture, or in any way arising from the transaction which this Guaranty is a part or arising in any manner in connection with the
Project, and each Guarantor hereby waives any rights or claims it may have against the Authority in connection therewith. 
  

	 	Section 7.	Release of a Guarantor. 

 This Guaranty will be released with respect to a Guarantor:

 (a) upon the sale or other disposition (including by way of merger or consolidation), to any Person that is not an Affiliate of the
Company, of all of the Capital Stock of that Guarantor held by the Company or any of its Subsidiaries or of all or substantially all of the assets of that Guarantor; 

(b) upon the contemporaneous or substantially contemporaneous release or discharge of such Guarantor (1) as a guarantor, borrower and/or
issuer in respect of the Senior Credit Facility or the Senior Subordinated Note Indenture and (2) if the Senior Credit Facility and the Senior Subordinated Note Indenture have been terminated, as a guarantor of any issue of any other
indebtedness for borrowed money or Capital Lease of more than $5.0 million in 

  
 -4- 

 
aggregate principal amount (per issue) of the Company or any of its Subsidiaries (other than any Subsidiaries of such Guarantor), except, in each case, as a result of payment by a guarantor in
its capacity as a guarantor (and not as a borrower and/or issuer); 
 (c) at any time that a Letter of Credit is in effect with respect to
the Bonds; or 
 (d) upon or substantially contemporaneously with the payment in full of the Guaranteed Obligations. 

The Trustee shall execute an appropriate instrument prepared by the Company evidencing the release of a Guarantor from its obligations under
this Guaranty upon receipt of a request by the Company or such Guarantor accompanied by (i) a Certificate of an Authorized Representative of the Company certifying as to the compliance with this Section 7, and (ii) so long as the
Senior Credit Facility is not in effect, in connection with a sale or disposition of assets or Capital Stock (or a series of related sales or dispositions) having a fair market value in excess of $5,000,000, as evidenced by a Certificate of an
Authorized Representative of the Company, an Opinion of Counsel as to the compliance with this Section 7, provided however, that the legal counsel delivering such Opinion of Counsel may rely as to matters of fact on one or more Certificates of
an Authorized Representative of the Company. 
  

	 	Section 8.	Waiver of Subrogation. 

 Until the payment in full of all Guaranteed Obligations, each
Guarantor hereby irrevocably waives and agrees not to exercise any claim or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Company’s obligations
under the Financing Agreement and such Guarantor’s obligations under this Guaranty, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution and indemnification and any right to
participate in any claim or remedy of the Authority or the Trustee against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or
receive from the Company, directly or indirectly, in cash or other assets or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding
sentence and any Guaranteed Obligations shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Authority or the Trustee, as applicable,
and shall forthwith be paid to the Authority or the Trustee, as applicable, to be credited and applied to the obligations in favor of the Authority or the Trustee, as applicable, whether matured or unmatured, in accordance with the terms of this
Guaranty. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Guaranty and that the waiver set forth in this Section 8 is knowingly made in contemplation of such
benefits. 
  

	 	Section 9.	Guaranteed Obligations Reinstated. 

 Subject to Section 7 hereof, the obligations of
each Guarantor hereunder shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment that would otherwise have reduced the obligations of any Guarantor hereunder (whether such

  
 -5- 

 
payment shall have been made by or on behalf of the Company or by or on behalf of a Guarantor) is rescinded or reclaimed from the Trustee upon the insolvency, bankruptcy, liquidation or
reorganization of the Company or any Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Company or any other Guarantor is stayed upon the insolvency, bankruptcy,
liquidation or reorganization of the Company or such Guarantor, all such indebtedness otherwise subject to demand for payment or acceleration shall nonetheless be payable by each Guarantor as provided herein. 

 

	 	Section 10.	Guaranteed Obligations Not Affected. 

 The obligations of each Guarantor hereunder shall
not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring before, upon or after any demand for payment hereunder (and whether or not known or consented to by any Guarantor or the Trustee) that,
but for this provision, might constitute a whole or partial defense to a claim against any Guarantor hereunder or might operate to release or otherwise exonerate any Guarantor from any of its obligations hereunder or otherwise affect such
obligations, whether occasioned by default of the Trustee or otherwise, including, without limitation: 
 (a) any limitation of status or
power, disability, incapacity or other circumstance relating to the Company or any other Person, including any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, winding-up or other proceeding involving or
affecting the Company or any other Person; 
 (b) any irregularity, defect, unenforceability or invalidity in respect of any indebtedness or
other obligation of the Company or any other Person under the Financing Agreement or any other document or instrument; 
 (c) any failure of
the Company or any other Guarantor, whether or not without fault on its part, to perform or comply with any of the provisions of this Guaranty or the Financing Agreement, or to give notice thereof to a Guarantor; 

(d) the taking or enforcing or exercising or the refusal or neglect to take or enforce or exercise any right or remedy from or against the
Company or any other Person or their respective assets or the release or discharge of any such right or remedy; 
 (e) the granting of time,
renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; 

(f) any change in the time, manner or place of payment of, or in any other term of, the Bonds or the Financing Agreement, or any other
amendment, variation, supplement, replacement or waiver of, or any consent to departure from, the Bonds or the Financing Agreement, including, without limitation, any increase or decrease in the principal amount of or premium, if any, or interest on
the Bonds; 
 (g) except as provided in Section 7, any change in the ownership, control, name, objects, businesses, assets, capital
structure or constitution of the Company or a Guarantor; 

  
 -6- 

 (h) except as provided in Section 7, any merger or amalgamation of the Company or a
Guarantor with any Person or Persons; 
 (i) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction
by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Guaranteed Obligations or the obligations of a Guarantor
under this Guaranty; and 
 (j) any other circumstance, including release of another Guarantor pursuant to Section 7 (other than by
complete, irrevocable payment), that might otherwise constitute a legal or equitable discharge or defense of the Company under the Financing Agreement or of a Guarantor in respect of its guarantee hereunder. 

 

	 	Section 11.	No Obligation to Take Action Against the Company. 

 The Trustee shall have no obligation
to enforce or exhaust any rights or remedies against the Company or any other Person or any property of the Company or any other Person before the Trustee is entitled to demand payment and performance by any or all Guarantors of their liabilities
and obligations under this Guaranty. 
  

	 	Section 12.	Dealing with the Company and Others. 

 The Trustee, without releasing, discharging,
limiting or otherwise affecting in whole or in part the obligations and liabilities of any Guarantor hereunder and without the consent of or notice to any Guarantor, may: 

(a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any
other Person; 
 (b) take or abstain from taking security or collateral from the Company or from perfecting security or collateral of the
Company; 
 (c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or
without consideration) any and all collateral, mortgages or other security given by the Company or any third party with respect to the obligations or matters contemplated by the Financing Agreement; 

(d) accept compromises or arrangements from the Company; 

(e) apply all monies at any time received from the Company or from any security upon such part of the Guaranteed Obligations as the Holders
may direct or change any such application in whole or in part from time to time as the Holders may direct; and 
 (f) otherwise deal with,
or waive or modify its right to deal with, the Company and all other Persons and any security as the Trustee may determine. 

  
 -7- 

	 	Section 13.	Representations. 

 Each Guarantor makes the following representations as of the date
hereof as the basis for its undertakings hereunder: 
 (a) It is a corporation, limited partnership or limited liability company duly
organized, and validly existing in good standing under the laws of the state of its organization, has the corporate, limited partnership or limited liability company, as applicable, power to enter into this Guaranty and to perform its obligations
hereunder, and by proper corporate action has duly authorized the execution and delivery of this Guaranty and performance of its obligations hereunder. 

(b) The execution and delivery of this Guaranty and the performance of its obligations hereunder do not and will not conflict with, or
constitute a breach or result in a violation of, its certificate of incorporation, bylaws or other organizational documents, as applicable, or any material agreement or other material instrument to which it is a party or by which it is bound or any
constitutional or statutory provision applicable to it, or order, rule, regulation, decree or ordinance of any court, government or governmental authority having jurisdiction over it or its property, in each case, the breach, conflict with or the
violation of any of which would have a material adverse effect upon the Guarantor’s ability to perform its obligations hereunder. 

(c) Except for the matters disclosed in the Limited Offering Memorandum dated March 26, 2013 with respect to the Bonds, or in the
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q or Periodic Reports on Form 8-K filed with the U.S. Securities and Exchange Commission, there are no pending or, to the best of each Guarantor’s knowledge, threatened
actions, suits, proceedings or investigations of a legal, equitable, regulatory, administrative or legislative nature, which could reasonably be expected to adversely affect in a material way its ability to perform its obligations under this
Guaranty. 
  

	 	Section 14.	Events of Default; Remedies. 

 Each of the following events shall be an Event of Default
hereunder: 
 (a) Failure of any Guarantor to pay any Guaranteed Obligations upon receipt of demand by the Trustee to such Guarantor given
in accordance with Section 20 hereof. 
 (b) The dissolution or liquidation of a Guarantor or the filing by a Guarantor of a voluntary
petition in bankruptcy, or the entry of any order or decree granting relief in any involuntary case commenced against a Guarantor under any present or future federal bankruptcy act or any similar federal or state law, or a petition for such an order
or decree shall be filed in any court and such petition shall not be discharged or denied within 90 days after the filing thereof, or if a Guarantor shall admit in writing its inability to pay its debts generally as they become due, or a receiver,
trustee or liquidator of a Guarantor shall be appointed in any proceeding brought against the Guarantor and shall not be discharged within 90 days after such appointment or if a Guarantor shall consent to such appointment, or assignment by the
Guarantor of all or substantially all of its assets for the benefit of its creditors, or the entry by the Guarantor into an agreement of composition with its creditors with respect to all or substantially all of its

  
 -8- 

 
assets, or a bankruptcy, insolvency or similar proceeding shall be otherwise initiated by or against a Guarantor under any applicable bankruptcy, reorganization or analogous law as now or
hereafter in effect and if initiated against the Guarantor shall remain undismissed (subject to no further appeal) for a period of 90 days; provided, the term “dissolution or liquidation of a Guarantor,” as used in this subsection, shall
not be construed to include the cessation of the existence of a Guarantor resulting either from a merger or consolidation of the Guarantor into or with another entity or a dissolution or liquidation of the Guarantor following a transfer of all or
substantially all of its assets as an entirety; and provided further that an Event of Default shall not be triggered under this Subsection (b) if the Company and the unaffected Guarantor or Guarantors shall continue to own more than 50% of the
consolidated assets of the Company and the Subsidiaries. 
 (c) If any representation made by a Guarantor contained in this Guaranty was
false or misleading in any material respect at the time it was made or delivered. 
 Whenever an Event of Default shall have happened and be
continuing, (a) the Trustee in the manner provided in Section 7.1 of the Indenture may declare the entire unpaid principal of, or redemption premium, if any, and interest on the Bonds to be immediately due and payable, and (b) the
Trustee may, in its discretion, or shall upon the written request of the Holders of 66 2/3% in principal amount of Bonds then Outstanding, take whatever action at law or in equity as may appear necessary or desirable to collect payments then due or
thereafter to become due hereunder or to enforce observance or performance of any covenant or agreement of the Guarantors under this Guaranty. 

In case the Trustee shall have proceeded to enforce this Guaranty and such proceedings shall have been discontinued or abandoned for any
reason, then and in every such case each Guarantor and the Trustee, subject to any determination in any applicable proceeding, shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the
Guarantors and the Trustee shall continue as though no such proceeding had been taken. 
  

	 	Section 15.	Successors and Assigns; Enforcement of Remedies. 

 This Guaranty shall be binding upon
and inure to the benefit of each Guarantor and the Trustee and their respective successors and permitted assigns, except that no Guarantor may assign any of its obligations hereunder. All rights against each Guarantor arising under this Guaranty
shall be for the sole benefit of the Trustee and the Holders of the Bonds and their respective successors and assigns and, with respect to payments due the Authority under Sections 4.2(d), 7.3, 9.2 and 9.3 of the Financing Agreement, the
Authority. If any Guarantor fails to pay in accordance with Section 1 hereof, the Trustee may proceed in the enforcement of this Guaranty and such Guarantor’s obligations thereunder and hereunder by any remedy provided by law, whether by
legal proceedings or otherwise, and to recover from such Guarantor the obligations, without exhausting any other remedies that the Trustee may have pursuant to the terms of the Bonds, the Indenture or the Financing Agreement and without resort to
any other security held by or available to the Authority or the Trustee. 

  
 -9- 

	 	Section 16.	Amendment of Guaranty. 

 The Trustee and the Guarantors may, without the consent of or
notice to the owners or beneficial owners of the Bonds, enter into any amendment, change or modification of this Guaranty (i) as may be required by the provisions of this Guaranty or the Indenture, (ii) for the purpose of curing any
ambiguity or inconsistency, defective provision or omission, (iii) in connection with an amendment of the Indenture or the Financing Agreement to effect any event or purpose for which there could be such an amendment without the consent of the
Holders, or (iv) in connection with any other change herein that is not to the material prejudice of the Trustee or the owners or beneficial owners of the Bonds. Except for the amendments, changes or modifications described in the preceding
sentence, the Trustee and the Guarantors may not enter into any other amendment, change or modification of this Guaranty without first mailing notice to, and obtaining the written approval or consent of, the owners or beneficial owners of not less
than a majority in aggregate principal amount of the Bonds at the time outstanding; provided, however, that the foregoing does not permit, without the written approval or consent of the Holders of 100% in aggregate principal amount of the Bonds then
Outstanding, an extension of the time of payment of, or a reduction in, any of the Guaranteed Obligations. In addition, any amendment, change or modification of this Guaranty relating to payments due the Authority under Section 4.2(d), 7.3, 9.2
or 9.3 of the Financing Agreement may only be made with the prior written consent of the Authority. No amendment, modification or waiver of any provision of this Guaranty relating to any Guarantor or consent to any departure by any Guarantor from
any such provision will in any event be effective unless it is signed by such Guarantor and the Trustee. Further, notwithstanding the foregoing, while the Senior Credit Facility remains in effect, the parties hereto agree that they will not
(x) amend, modify or waive the provisions set forth in Section 7 of this Guaranty or (y) amend, modify or waive any of the other provision of this Guaranty (i) if the effect of such modification or waiver would be to delete or
otherwise render ineffective the references to Section 7 expressly contained in such provision or (ii) in a manner that could reasonably be expected to be materially adverse to the holders of the Senior Credit Facility, without, in each
case, the prior written consent of the administrative agent thereunder. 
  

	 	Section 17.	No Merger or Waiver; Cumulative Remedies. 

 This Guaranty shall not operate by way of
merger of any of the obligations of a Guarantor under any other agreement. No failure to exercise and no delay in exercising, on the part of the Trustee, any right, remedy, power or privilege under the Indenture or the Financing Agreement shall
operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under the Indenture or the Financing Agreement preclude any other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. The rights, remedies, powers and privileges in this Guaranty and under the Indenture, the Financing Agreement and any other document or instrument between a Guarantor and/or the Company and the Trustee or the Authority are
cumulative and not exclusive of any rights, remedies, powers and privilege provided by law. 

  
 -10- 

	 	Section 18.	Survival of Guaranteed Obligations. 

 Subject to Section 7 hereof, the obligations
of each Guarantor under Section 1 shall be enforceable against such Guarantor without regard to and without giving effect to any defense, right of offset or counterclaim available to or which may be asserted by the Company or any Guarantor.

  

	 	Section 19.	Guaranty in Addition to Other Guarantee Obligations. 

 The obligations of each Guarantor
under this Guaranty are in addition to and not in substitution for any other obligations to the Trustee in relation to the Financing Agreement and any guarantees or security at any time held by or for the benefit of the Trustee. 

 

	 	Section 20.	Notices. 

 Demand for payment by any Guarantor of the amounts guaranteed hereunder shall
be made by notice in writing as provided in the next sentence. All demands, notices, approvals, consents, requests and other communication hereunder shall be in writing addressed to the applicable Guarantors, c/o the address of the Company as set
forth in Section 11.8 of the Indenture, and shall be deemed to have been given: (i) when the same are delivered by hand, or (ii) when the same are sent by confirmed facsimile transmission, or (iii) on the next Business Day when
the same are sent by overnight delivery service (with delivery confirmed). The Guarantors, the Company, the Authority and the Trustee may, by notice given hereunder, designate any further or different addresses or means of communication to which
subsequent demands, notices, approvals, consents, requests or other communications shall be sent or persons to whose attention the same shall be directed. 
  

	 	Section 21.	Miscellaneous. 

 (a) Any provision of this Guaranty that is prohibited or unenforceable
in any jurisdiction shall not invalidate the remaining provisions and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction unless its removal would
substantially defeat the basic intent, spirit and purpose of this Guaranty. 
 (b) This Guaranty shall be governed by and construed in
accordance with the laws of the State of Vermont without giving effect to principles of conflicts of law. Each of the undersigned Guarantors hereby agrees to submit to the jurisdiction of the courts of the State of Vermont in any action or
proceeding arising out of or relating to this Guaranty. 
 (c) Each Guarantor hereby acknowledges communication of the terms of this
Guaranty, the Indenture and the Financing Agreement and consents to all the terms, covenants and conditions thereof. 
 (d) No director,
officer, employee, incorporator or stockholder of any Guarantor, as such, shall have any liability for any obligations of the Guarantors hereunder or for any claim based on, in respect of, or by reason of, such obligations or their creation. 

  
 -11- 

 (e) Each Guarantor shall pay on demand by the Trustee any and all reasonable costs, fees and
expenses incurred by the Trustee, its agents and advisors and in enforcing any of their rights under this Guaranty. 
 (f) This Guaranty may
be executed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute but one and the same instrument. 

[Signature Page Follows] 

  
 -12- 

 IN WITNESS WHEREOF, the parties have caused this Guaranty to be executed by their duly
authorized representatives as of the date first above written. 
  

	
	 ALL CYCLE WASTE, INC.

	 ATLANTIC COAST FIBERS, INC.

	 B. AND C. SANITATION CORPORATION

	 BLOW BROS.

	 BRISTOL WASTE MANAGEMENT, INC.

	 C.V. LANDFILL, INC.

	 CASELLA ALBANY RENEWABLES, LLC

	 CASELLA MAJOR ACCOUNT SERVICES, LLC

	 CASELLA RECYCLING, LLC

	 CASELLA RENEWABLE SYSTEMS, LLC

	 CASELLA TRANSPORTATION, INC.

	 CASELLA WASTE MANAGEMENT OF MASSACHUSETTS, INC.

	 CASELLA WASTE MANAGEMENT OF N.Y., INC.

	 CASELLA WASTE MANAGEMENT OF PENNSYLVANIA, INC.

	 CASELLA WASTE MANAGEMENT, INC.

	 CASELLA WASTE SERVICES OF ONTARIO LLC

	 CHEMUNG LANDFILL LLC

	 COLEBROOK LANDFILL LLC

	 CWM ALL WASTE LLC

	 FOREST ACQUISITIONS, INC.

	 GRASSLANDS INC.

	 GROUNDCO LLC

	 HAKES C&D DISPOSAL, INC.

	 HARDWICK LANDFILL, INC.

	 HIRAM HOLLOW REGENERATION CORP.

	 KTI BIO FUELS, INC.

	 KTI ENVIRONMENTAL GROUP, INC.

	 KTI NEW JERSEY FIBERS, INC.

	 KTI OPERATIONS, INC.

	 KTI SPECIALTY WASTE SERVICES, INC.

	 KTI, INC.

	 MAINE ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

	 NEW ENGLAND WASTE SERVICES OF MASSACHUSETTS, INC.

	 NEW ENGLAND WASTE SERVICES OF ME, INC.

	 NEW ENGLAND WASTE SERVICES OF N.Y., INC.

	 NEW ENGLAND WASTE SERVICES OF VERMONT, INC.

	 NEW ENGLAND WASTE SERVICES, INC.

	 NEWBURY WASTE MANAGEMENT, INC.

	 NEWSME LANDFILL OPERATIONS LLC

 [Signature Page to Guaranty Agreement] 

 
			
	 NEWS OF WORCESTER LLC

	 NORTH COUNTRY ENVIRONMENTAL SERVICES, INC.

	 NORTHERN PROPERTIES CORPORATION OF PLATTSBURGH

	 PINE TREE WASTE, INC.

	 RESOURCE WASTE SYSTEMS, INC.

	 SCHULTZ LANDFILL, INC.

	 SOUTHBRIDGE RECYCLING & DISPOSAL PARK, INC.

	 SUNDERLAND WASTE MANAGEMENT, INC.

	 THE HYLAND FACILITY ASSOCIATES

	 U.S. FIBER, LLC

	 WASTE-STREAM INC.

	 WINTERS BROTHERS, INC.

		
	By:	 	 /s/ Edmond R. Coletta

	Name:	 	Edmond R. Coletta
	Title:	 	Vice President and Treasurer

  
 [Signature Page to
Guaranty Agreement (Cont.)] 

			
	Accepted:
	
	 U.S. BANK NATIONAL ASSOCIATION,

as Trustee

		
	By	 	 /s/ Vernita L. Anderson

	Name:	 	Vernita L. Anderson
	Title:	 	Assistant Vice President

  
 [Signature Page to
Guaranty Agreement (Cont.)]

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