Ferry Business Case for LNG

Ferry Business Case for LNG Interferry 39 th Annual Interferry Conference Westin Bayshore 4-8 October 2014 Vancouver, BC John Hatley PE LNG Initiatives Americas VP Ship Power Wartsila North America, Inc. Cell 281 221 4209 john.hatley@wartsila.com 1 Wärtsilä

Agenda What? Why? Application 3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices 5 Drivers Set Investment Clock Business Case Returns US Jones Act 150 Car Ferry Vehicle Driver, Owner, Banker Views Conclusions Recent Market Signals The Future Decade for Gas Appendix Data

Agenda What? Why? Application 3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices 5 Drivers Set Investment Clock Business Case Returns US Jones Act 150 Car Ferry Vehicle Driver, Owner, Banker Views Conclusions Recent Market Signals The Future Decade for Gas Appendix Data

3 Pillars LNG Fuel Vessels ENVIRONMENT SUSTAINABILITY ECONOMICS SAFE & RELIABLE Proven LNG systems... reduce risk for yard, owner, & banker... extends LNG value proposition to end customer 07 October 2014

Pillar... Environmental Sustainability Natural gas a mixture of hydrocarbon gases associated with petroleum deposits, principally methane. Methane has the highest hydrogen to carbon ratio = lowest CO2. Methane [CH 4 ] Ethane [C 2 H 6 ] Propane [C 3 H 8 ] Butane [C 4 H 10 ] 4:1 (400%) 6:2 (300%) 8:3 (267%) 10:4 (250%) Natural gas lowest MGO carbon 1.86:1 (186%) = cleanest burning fuel

How clean? LNG provides significant emission reductions compared to traditional diesel engines -25% -85% Emission values [%] 100 80 60 40 CO 2 NO x -99% 20 SO x -99% Particulates DF Natural Gas Engine Diesel Engine 0

Pillar Logic Economics... it! saves money! LNG provides compelling savings Business Cases demonstrate Payback screen short term <5 years... Strong cash flows Higher ROIC & EBITDA Competitive Advantage 07/10/2014

Fuel Prices on Energy Basis $ / mmbtu 30 20 10 0 380 cst HFO 1% MGO 0.1% diesel LNG Japan LNG Europe Fuel price dominates OPEX America s gas is Abundant, available, affordable, & cleanest fuel LNG USA 07 October 2014

How much does LNG cost? Source: Zeus LNG Fuel Seminar, August 31, 2011 Houston; Fleet Operators Perspective: Issues the LNG Industry Must Address, David Moseley, Assist Secretary Washington State DOT The Math LNG x 1.7 = Diesel Gallon Equivalent = $1.05 x 1.7 = $ 1.78 gallon diesel equivalent = savings ( $3.37 - $1.78 ) = $ 1.58 per gallon LNG captures compelling fuel savings. nearly half cost of diesel

Pillar Safe & Reliable Viking Energy 2003 Stril Pioner 2004 Europe s decade LNG experience began offshore North Sea vessels proven path for technology transfer to Americas

Major Global Shale Basins Source: http://www.eia.gov/analysis/studies/worldshalegas/ 07 October 2014

Global Gas Production USA is world s #1 gas producer US Shale gas production, by itself, exceeds all nations except Russia Source: LNG for Marine Transportation USA, Houston TX, June 12, 2013; David Sweet President Natural Gas Roundtable http://lngmarineevent.com/presentations/2013/david-sweet.pdf 07 October 2014

Emission Control Areas More Emission Control Areas ECA likely soon

ECA Vessel Owner Choices 1. Consume compliant Ultra Low Sulfur Distillate expensive champagne fuel 2. Switch to alternative fuel: safe, clean, abundant, affordable, & available natural gas as LNG 3. Alternative Compliance install new technology scrubber CAPEX, OPEX, space, weight, complexity, & operational tradeoffs 4. Abort the Port ECA and SECA mandates force timely choices options 1,4 invoke business reset LNG OPEX Savings 07 October 2014

Agenda What? Why? Application 3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices 5 Drivers Set Investment Clock Business Case Returns US Jones Act 150 Car Ferry Vehicle Driver, Owner, Banker Views Conclusions Recent Market Signals The Future Decade for Gas Appendix Data

Shale Gas Plays Shale. huge reserves natural gas; nearly century supply 16 Wärtsilä

Abundant Gas Supply Paradigm shift to shale gas; now 25% of supply... future @ half 17 Wärtsilä

Annual Shale Gas Production Other US Bakken ND Eagle Ford TX Marcellus PA Haynesville LA 24% CAGR Woodford OK Fayetteville AR Barnett TX Antrim MI, IN 41% CAGR 17% CAGR Shale production surge 2006 frantic 2010 strong

Emission Control Area ECA US & Canada Puerto Rico US Virgin Islands 2014 ECA bubble encapsulates any flag ships.. 200 nautical miles low sulfur fuel (equivalence) enforceable August 2012 07 October 2014 Source: US EPA, Designation of North American Emission Control Area to Reduce Emissions from Ships

No. Am. ECA Fuel Sulfur Limit Fuel Sulfur 0.10 % limit commences 1 January 2015 Source:http://www.dnvusa.com/industry/maritime/publicationsanddownloads/publications/newsletters/technical_regulatory/2012 /north_american_emission_control_area.asp 20 Wärtsilä

5 US Game Changers EPA Engine Emissions US centuries shale gas supply Emissions Control Area 2012 Natural Gas bargain EPA Fuel Standards 5 gas drivers shale supply + bargain prices + 3 EPA mandates = set Investment Clock Source:http://www.google.com/imgres?imgurl=http://www.canadiansailings.ca/canadiansailings/portals/0/April_13/emissions_area_map.jpg&imgrefurl=http:// EIA March 2010 Shale Gas Plays Lower 48 States

Agenda What? Why? Application 3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices 5 Drivers Set Investment Clock Business Case Returns US Jones Act 150 Car Ferry Vehicle Driver, Owner, Banker Views Conclusions Recent Market Signals The Future Decade for Gas Appendix Data

Ferry Particulars US Flag Jones Act Ferry 150 Cars / 800 Passengers Double Ender Cruise 16.4 knots ( 3 engines online, 1 standby ) Design 17.5 knots ( 4 online w/margin) Total propulsion power 8,900 HP ( 4 units @ 1665 kw ) Onboard Crew & Concessions = 24; SOLAS & Class Rapid Load/offload ~ 40 minutes @ standard berth Cruising @ 4 daily round trips peak weekends & holidays ( 61 days ) 3 RT daily busy season ( 152 days ) 2 RT daily offseason ( 152 days ) = 1004 RT/ year 23 Wärtsilä

Case Route: Anacortes - Victoria Emission Control Area ECA bound nearby access to densely populated I5 Corridor 36 Nautical Mile distance 24 Wärtsilä

4 Stakeholders At fair return capturing risks FERRY OWNER Ultimate Environment Safety PUBLIC VEHICLE DRIVER 25 Wärtsilä Transport safely at optimal cost reliably BANKER Are risks understood & I m repaid!

Recall? 26 Wärtsilä

Vehicle Driver Transport safely at optimal cost reliably Lowest fare cost per car ( driver + 1.5 passengers ) for vessels running on LNG fuel fuel surcharge becomes LNG rebate! 27 Wärtsilä

Vehicle Driver Move it safely at optimal cost reliably LNG fuel provides millions in transport savings compelling LNG fuel savings over diesel or scrubbers 28 Wärtsilä

Ferry Owner At fair return capturing risks Competitive Advantage; LNG risk adjusted return is highest & yet preserves vehicle driver savings from fuel. 29 Wärtsilä

Ferry Owner At fair return capturing risks Millions $25 EBITDA $20 LNG Fuel $15 $10 HFO + Scrubber $5 LNG fuel has strongest EBITDA + $0.6 Million above HFO+ Scrubber and + $1.3 Million atop MDO. 30 Wärtsilä MDO Fuel Years

Stress Test ROIC BASELINE LNG Revenue CAPEX LNG Price Crew $23.95 M / yr $122.0 M 550 $/mt $4.788 M / yr Sensitivity Rankings Revenue CAPEX Crew LNG Price Shows relative impacts to return on invested capital; business case = robust across scenarios. 31 Wärtsilä Deviation

Banker Are risks understood & I m repaid! Debt cover is strongest on LNG choice over alternative fuels, banker loan has greater security with LNG. 32 Wärtsilä

Banker Are risks understood & I m repaid! Millions $15 $10 $5 $0 ($5) ($10) EBIT MDO Fuel LNG Fuel HFO + Scrubber Years LNG has strongest EBIT US IRS Depreciation 10 Year MACRS ½ Year Convention Dry docking years 5,10,15,20 33 Wärtsilä

Agenda What? Why? Application 3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices 5 Drivers Set Investment Clock Business Case Returns US Jones Act 150 Car Ferry Vehicle Driver, Owner, Banker Views Conclusions Recent Market Signals The Future Decade for Gas Appendix Data

5 August 2012 TOTE Promises LNG Adoption First mover TOTE: 2 US Flag Jones Act RORO vessels to retrofit LNG fuel technology 7 October 2014

3 December 2012 Americas early adopter 1 st LNG DF ferry North America 07/10/2014

4 December 2012 Americas early adopter CAPEX $360 Million + 3 Options 07/10/2014

10 June 2013 Source: STX US Marine Design Source: STX US Marine Design Harvey Gulf Orders 6 th LNG boat for US GOM based on European experience Wartsila LNGpac kit reduces risk 07/10/2014

9 August 2013 Crowley 1 st of 4 New tankers LNG ready 4 options likely LNG fuel 39 Wärtsilä

11 September 2013 STQ orders 2 ship sets Wartsila fully integrated LNG packages 07 October 2014

11 September & 12 November 2013 SEACOR orders 2 + optional 2 tankers... LNG ready 07 October 2014

2 Oct 2013 Source: http://www.socgmf.org/ Society Gas Marine Fuel... Inaugural meeting for Houston 18 November... Memberships now open 42 Wärtsilä

7 November 2013 Matson orders 2 box ships... LNG ready 07 October 2014

25 November 2013 Crowley orders 2 box ships... World s 1 st LNG fuel ConRo s 07 October 2014

7 January 2014 LNG Fuel SCORECARD 17 Ferries 12 Tankers & Bulkers 6 Offshore Vessels 6 Container Ships 1 Articulated Tug Barge North America s marine LNG fuel launch eclipses Europe! Source: http://www.worldlngfuels.com/news/more-than-40-lngfueled-ships-planned-in-north-america-world-lng-fuels-conference-to-examine/ 45 Wärtsilä

14 February 2014 Source: http://www.bizjournals.com/jacksonville/printedition/2014/02/14/why-is-jacksonville-suddenly-lng.html?s=image_gallery 3 LNG players pursue Jacksonville: Pivotal LNG + WesPac Midstream, Clean Energy, and SEMPRA US Power & Gas 07 October 2014

14 February 2014 Harvey Gulf Port Fourchon LNG fueling facility operational 2015 Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6264:harvey-gulf-breaks-ground-forlng-fueling-facillity&itemid=227 47 Wärtsilä.

18 February 2014 2 Vessels total 94mW = North America s largest LNG conversion undertaken! 48 Wärtsilä Source: http://www.motorship.com/news101/lng/tote-goes-withwartsila-four-strokes-for-lng-conversions

24 February 2014 MARAD Title 11 program expands economic criteria to include environmental technology LNG fuel! Title 11: US Government Loan Guarantee term 25 years, 12.5% equity provides Ship Owners US Treasury Borrowing Rates + premium 49 Wärtsilä

25 February 2014 1 st LNG fuel containerships commence construction @ NASSCO Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6310:tote-cuts-steel-for-lng-fueledcontainership&itemid=227. 50 Wärtsilä

11 March 2014 LNG bunker barge designs moving industry forward Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6373:elliott-bay-design-group-getsaip-for-lng-bunker-barge&itemid=225. 51 Wärtsilä

16 April 2014 Americas industrial base expanding supply of key LNG enablers Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6580:lockheed-martin-delivers-lng-tank-forharvey-gulf-newbuild&itemid=231 52 Wärtsilä

17 April 2014 Source: http://www.caribbeanbusinesspr.com/prnt_ed/crowley-extremely-positive-aboutlng-units-growth-prospects-9768.html Safe, clean, low cost LNG fuel from US shipments may lower power costs 07 October 2014

16 June 2014 American Petroleum Tankers APT orders another LNG ready tanker from NASSCO Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6853:nassco-books-another-jonesact-tanker-order&itemid=223 54 Wärtsilä.

25 June 2014 Crowley and TOTE filing for MARAD Title 11 Loan Finance Guarantees Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6905:crowley-seeks-title-xi-guarantees-for-lngfueled-conro-pair&itemid=223. 55 Wärtsilä

3 July 2014 Now 6 LNG fuel ferries for Canada as BC Ferries (3) follows STQ 56 Wärtsilä Source: https://www.bcferries.com/bcferries/faces/attachments?id=856428

15 July 2014 Prohibitively expensive compliant diesel inside ECA in 2015! More Traditional Pain = More LNG Gain 57 Wärtsilä Source: http://maritimeintel.com/maersk-warns-sulphur-regulation-will-cost-us250-million-annually/

Drivers = Decade Shift to Gas Mandated Emissions & Fuel Restrictions Geographic emissions bubble encapsulates US/Canada Tight sulfur limits stress supply After treatment burdens diesels Source: US EPA web sites, Hatley capture various sources Paradigm shift to gas 1 st on economics 2 nd on emissions Early adopters moving ahead soon early followers! 2015 Fuel Sulfur 1/10% = Stress Mid decade market tipping point 07 October 2014

APPENDIX Business Case Details 59 Wärtsilä

Financials 60 Wärtsilä

Key Values 61 Wärtsilä

Recent 2014 Fuel Prices Recent Prices: LS180 1% 699 $/mt LSMGO 0.1% 1050 $/mt 62 Wärtsilä Source: http://www.bunkerworld.com/prices/port/us/hou/

Key Values 63 Wärtsilä

Fuel Attributes Utilize fuels specific for regional case... As fuels vary significantly, the historic dollars per ton or gallon is challenging to use as different fuels host widely varying different energy content, density, value... 64 Wärtsilä

Existing US Routes to Vancouver Island Anacortes to Sidney or Coupeville Port Townsend + then Port Angeles Victoria 65 Wärtsilä

Red Route: Inter-island to Sidney Anacortes to Sidney BC Standard Vehicle & Driver + 1.5 Passengers WSF total $92.38 + concessions 66 Wärtsilä

Yellow Route: Puget Sound then Straits to Victoria Keystone to Port Townsend Port Angeles to Victoria Standard Vehicle & Driver + 1.5 Passengers WSF + Black Ball 67 Wärtsilä total $106.52 + concessions

Port Distances 68 Wärtsilä

Agenda What? Why? Application 3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices 5 Drivers Set Investment Clock Business Case Returns US Jones Act 150 Car Ferry Vehicle Driver, Owner, Banker Views Conclusions Recent Market Signals The Future Decade for Gas Appendix Data