WORKSHOP SESSION II: FINANCING JONES ACT VESSELS PROGRAM DESCRIPTION “By using the MARAD CCF program in combination with MARAD Title XI or DOE loan guarantees, a TIV purchaser may be able to reduce the fully financed cost of a U.S. built $300 million shipyard priced TIV, from $438 million to $270 million, for a savings of $168 million (or over 38%). The presentation will provide an example of Jones Act non-citizen lease financing ownership under 46 U.S.C. 12119 in explaining the CCF program fund subject matter.” Workshop Session II, Financing Jones Act Vessels Presentation Description 1

FINANCING JONES ACT VESSELS WORKSHOP SESSION II: OPPORTUNITIES FOR US SHIPBUILDING FINANCING JONES ACT VESSELS INTRODUCTION: THE JONES ACT OPPORTUNITY WIND FARM VESSEL FLEET & FINANCING STRUCTURES MARAD TITLE XI & CCF PROGRAMS NAVY DUAL USE VESSEL (DUV) PROGRAM LEASE FINANCING & NON-CITIZEN LEASE FINANCING FIVE POINTS TO REMEMBER H. Clayton Cook, Jr, Attorney, Cook Maritime Finance Tricia Love Thomas, Gross Mendelsohn CPAs and Advisors September 28, 2015 Pier V Hotel, Baltimore, Maryland

FINANCING JONES ACT VESSEL ASSETS INTRODUCTION: THE JONES ACT OPPORTUNITY WIND FARM VESSEL FLEET & FINANCING CHOICES MARAD TITLE XI & CCF PROPGRAMS NAVY DUAL USE VESSEL (DUV) PROGRAM LEASE FINANCING & NON-CITIZEN LEASE FINANCING FIVE POINTS TO REMEMBER 3

FINANCING JONES ACT VESSEL ASSETS INTRODUCTION: THE “JONES ACT” OPPORTUNITY Transportation by water of people and merchandise between two points in the U.S. must be by Jones Act qualified vessels – constructed in the U.S. and owned and operated by U.S. citizens. Corporations have U.S. citizen officer and director and 75% U.S. citizen equity requirements for owners and operators in Jones Act trades, except that financial institution owner-lessors with demise charters to U.S. citizens qualifying under 46 U.S.C. 12119 are exempt from the 75% equity requirement. 4

FINANCING JONES ACT VESSELS WIND FARM VESSEL FLEET & FINANCING CHOICES The wind farm vessel fleet will include small and medium sized support vessels, a variety of medium sized vessels for the transportation of wind farm equipment, and specialty vessels for foundation and wind turbine installation. With shipyard prices ranging from $4 million to $300 million or more, owners will select a variety of financing structures and debt and equity sources. 5

FINANCING JONES ACT VESSELS MARAD TITLE XI & CCF PROGRAMS 6

FINANCING JONES ACT VESSELS MARAD TITLE XI & CCF PROGRAMS The MARAD Title XI Program (Title XI) is available to U.S. citizen Jones Act owners. It allows an owner to issue bonds to finance up to 87.5 percent of a vessel’s cost, with 20 to 25 maturities, with a U.S. Treasury guarantee of the payment of principal and interest, in exchange for the owner’s payment of modest transaction investigation and guarantee fees. 7

FINANCING JONES ACT VESSELS MARAD TITLE XI & CCF PROGRAMS Current coupon rates are approximately 3.25 percent. MARAD transaction processing, from completed application to bond closing, now takes 12 to 18 months. 8

FINANCING JONES ACT VESSELS MARAD TITLE XI AND CCF PROGRAMS The MARAD Capital Construction Fund Program (“CCF”) is available to U.S. owners and operators of U.S. vessels operated in “qualifying trades” and to shipyards building vessels for these trades. 9

FINANCING JONES ACT VESSELS MARAD TITLE XI & CCF PROGRAMS The tax deferrals are provided under a contract in which the U.S. government agrees to honor current tax reductions, in exchange for taxpayer agreement to use the monies set aside for the acquisition or construction of vessels to be built in U.S. shipyards for operations in “qualifying trades”. 10

FINANCING JONES ACT VESSELS MARAD TITLE XI & CCF PROGRAMS The requirements for CCF Program participation, and the Program’s basic applications in assisting in the accumulation of monies for fleet new buildings, by and retiring vessel debt, are explained in my “Financing with the Maritime Administration’s Capital Construction Fund”, MARINE MONEY International, October 2007, that is being provided as a panel handout. 11

FINANCING JONES ACT VESSELS NAVY DUAL USE VESSEL (DUV) PROGRAM The concept of “dual-use vessels” (DUV) is as old as the Republic itself, and was incorporated in the Merchant Marine Acts of 1920, 1936 and 1970. 12

FINANCING JONES ACT VESSELS NAVY DUAL USE VESSEL (DUV) PROGRAM The current DUV program was initiated in 2005. Reacting to operator concerns about U.S. shipyard Jones Act vessel prices, the Navy held invitation-only National Shipbuilding Research Program (NSRP) Workshops in 2007 and 2008 to address means by which the shipyard prices for these Jones Act dual-use vessels could be reduced to commercially acceptable levels. 13

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP The NSRP 2007 Workshop was directed to methods for reducing shipyard costs and the anticipated follow-on reductions in shipyard sales prices. But, of course, it would be the private sector vessel purchaser’s “fully financed cost”, rather than the shipyard sales price, that would be used to test the vessel owner’s business plan. 14

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP A study of commercially available financing alternatives and of MARAD Title XI and CCF Program use was undertaken to provide the for a “cost-of-financing” presentation for the 2008 NSRP Workshop. 15

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP The study found that by using the MARAD Title XI and CCF Programs together, significant reductions in vessel costs could be achieved. This was accomplished by the CCF Program fund-holder depositing additional equity in the vessel CCF Program account, that when invested in high interest debt, and compounded over a 20 year term, would produce investment income, which when combined with the additional equity, would be sufficient to retire the entire Title XI debt. 16

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP The reduction in vessel cost would be the difference between the Title XI debt principal amount and the measure of the additional equity. In the examples that follow, the first slide shows a $150 million shipyard priced DUV/AMH vessel financed with Title XI, and the second slide shows this same vessel financing with the addition of the CCF Program sinking fund. 17

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP You will see that for this $150 million vessel, the fully financed cost would be $198.8 million with Title XI financing, and $123.9 million using Title XI with the addition of the CCF Program sinking fund. 18

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP EXAMPLE NO. 1, TABLE 1, MARAD TITLE XI FINANCING 1. Shipyard Price $150,000,000 2. Total Title XI MARAD “Capitalized Cost” $159,631,891 Title XI Coupon Rate 3.01% Effective Corporate Tax Rate 35.00% 3. Total Title XI Equity & Interest Payments $62,888,274 4. Total Title XI Fixed Principal Payments $135,887,274 5. Total Cash Cost of Vessel $198,773,706 ______________________________ Method of Debt Financing: Title XI, fixed principal, 80% of capitalized cost, 20 year term, level principal payments. 19

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP EXAMPLE No. 1, TABLE 2, TITLE XI & CCF FINANCING Shipyard Price $150,000,000 2. Total Title XI Equity & Interest Payments $62,868,274 3. Total Title XI Fixed Principal Payments $134,885,432 4. Total Title XI Debt & Equity Cash Cost $198,773,706 5. Yield on CCF Investments 13.01% 6. Total Title XI Equity & Interest Payments $61,388,274 7. Total CCF Contributions & Taxes on Withdrawals $60,951,346 8. Total Cash Cost of Vessel with Title XI & CCF $123,939,620 9. CCF Savings over Title XI alone (37.55 percent) $74,634,086 20

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP WORKSHOP Here is a graphical representation of the CCF accounts deposits and withdrawals involved. $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Term of Debt Financing (Years) 21

FINANCING JONES ACT VESSELS NAVY DUV PROGRAM & NSRP 2008 WORKSHOP The development of these MARAD Title XI and CCF structures for the DUV program and their use in Jones Act lease financing is explained in Patrick Ogle’s and my article “Financing Jones Act Vessel Assets”, in MARINE MONEY International’s May 2010 issue, that is one of today’s panel handouts. The methodology involved in crafting these structures is protected by the U.S. Patent No. US 8,010,431 B 1, “System and Method for Financing Vessels” issued on August 30, 2011. 22

FINANCING JONES ACT VESSELS JONES ACT LEASE FINANCING Lease financing was chosen for many U.S. flag vessel projects during the 1970s and 1980s. Leasing company affiliates of institutions like Bank of America, Bankers Trust Company, Citibank Leasing, GATX and GE Credit & Leasing provided an active market in U.S. citizen leasing equity. 23

FINANCING JONES ACT VESSELS LEASE FINANCING WITH MARAD PROGRAMS Where the MARAD Programs were employed, the owner-lessor was able to: (i) use the Title XI Program to leverage its equity investment with low-cost long-term debt; and (ii) use the CCF Program to shelter its high-yield investment income. 24

FINANCING JONES ACT VESSELS LEASE FINANCING WITH MARAD PROGRAMS MARAD Program use enhanced the owner-lessor’s return, providing benefits that might be shared with the operator, or with the operator and its customer, through reductions in demise charter and/or time charter hire charges. 25

FINANCING JONES ACT VESSELS LEASE FINANCING WITH MARAD PROGRAMS LEASE FINANCING DIAGRAM 1: U.S. citizen leasing with MARAD programs. § 2 Leasing Company § 2 Operator 20 Year Demise Charter MARAD Title XI Bonds CCF Tax Shelter For example: U.S. citizen owner-lessor – Citibank Leasing or GE Credit & Leasing; and U.S. citizen operator – Keystone Shipping Company or Marine Transport Lines. 26

FINANCING JONES ACT VESSELS LEASE FINANCING WITH NON-CITIZEN OWNERS The qualifications for Jones Act vessel owners were changed in 1996 and again in 2004. Now non-citizen financial institutions may function just as Citibank Leasing and GE Credit & Leasing served as vessel owners in Lease Financing Diagram 1. Ownership of Jones Act qualified vessels by non-citizen leasing companies is now allowed under section 12119 if the vessel is demise chartered to a section 50501 U.S. citizen operator for three years or more. ______________________________ The codification of Title 46 U.S.C. was completed in 2006, and section 2 is now section 50501 and section 12106(e) is now section 12119. 27

FINANCING JONES ACT VESSELS LEASE FINANCING WITH NON-CITIZEN OWNERS The potential importance section 12119 leasing is illustrated by the $1.2 billion Aker Philadelphia Shipyard Jones Act transaction with the Overseas Shipholding Group (OSG). The vessels were built by a Norwegian managed shipyard and sold to a Norwegian controlled section 12119 leasing company, that demise chartered the vessels to OSG as the U.S. section 50501 citizen operator, for a term of 8 years. The initial OSG time charters were to United Kingdom and United Kingdom/Netherlands international oil companies. 28

LEASE FINANCING DIAGRAM 2: Section 12119 leasing with non-citizen owner-lessor; U.S. citizen operator; and non-citizen lender syndicate and time charterers. 8 Year Demise Charter Time Charters 12119 Leasing Company 50501 Operator Non-citizen Users Lender Group Parents Parents – Aker ASA & Aker Philadelphia Shipyard section 12119 owner lessor– Aker American Shipping (Oslo Exchange); U.S. citizen operator – Overseas Shipholding Group; and non-citizen lender group –DnB NOR Bank. 29

FINANCING JONES ACT VESSELS LEASE FINANCING WITH NON-CITIZEN OWNERS This Lease Financing Diagram 2 schematic might easily be adapted for a section 12119 non-citizen or hedge fund lease financing for an offshore wind farm $300 million turbine installation vessel (TIV) as displayed in this next Lease Financing Diagram 3. 30

LEASE FINANCING DIAGRAM 3: Leasing of TIV with section 12119 non-citizen owner-lessor; U.S. citizen operator; and turbine installation contract with non-citizen project manager. Demise Charter Installation Contract 12119 Leasing Company 50501 Operator Lender Group Non-citizen Equity Project Company Non-citizen 12119 leasing company owner–lessor; U.S. Citizen Operator; and non-citizen project manager. 31

FINANCING JONES ACT VESSELS NON-CITIZEN LEASE FINANCING AND 46 USC 12119 $300 MILLION TIV EXAMPLE Tricia Thomas, who is a principal with Baltimore based Gross Mendelsohn CPAs & Advisors, will take over here to explain this example line by line. 32

FINANCING JONES ACT VESSELS NON-CITIZEN LEASE FINANCING & 46 USC 12119 $300 MILLION TIV EXAMPLE Working with a U.S. shipyard in 2010, we were asked to run examples of a “fully financed cost” for a $300 million TIV for use in U.S. East Coast offshore wind projects -- using the MARAD program financing structure that we had developed for the Navy NSRP 2008 Workshop. 33

FINANCING JONES ACT VESSELS NON-CITIZEN LEASE FINANCING & 46 USC 12119 $300 MILLION TIV EXAMPLE We found that by using this MARAD financing structure, the purchaser would have been able to reduce its TIV “fully financed cost” (equity+principal+interest) of the $300 million TIV from $438,370,562 (which it would have been in a simple Title XI financing) to $299,999,995 (which it would have been once CCF use was added) achieving a savings of $138,370,567 or 31.35 percent. 34

FINANCING JONES ACT VESSELS NON-CITIZEN LEASE FINANCING & 46 USC 12119 $300 MILLION TIV EXAMPLE EXAMPLE No. 2, TABLE 1, MARAD TITLE XI FINANCING 1. Shipyard Price $300,000,000 2. Total Title XI Capitalized Cost $315,740,839 Title XI Coupon Rate 4.16% Effective Corporate Tax Rate 35.00% 3. Total Title XI Equity & Interest Payments $162,097,327 4. Total Title XI Fixed Principal Payments $276,273,234 5. Total Title XI Debt & Equity Cash Cost $438,370,562 ___________________________________ Method of Debt Financing: Title XI, fixed principal, 20 year term, level principal payments.

FINANCING JONES ACT VESSELS NON-CITIZEN LEASE FINANCING & 46 USC 12119 $300 MLLION TIV EXAMPLE EXAMPLE No. 2, TABLE 2 MARAD TITLE XI & CCF Shipyard Price $300,000,000 Total Title XI Equity & Interest Payments $162,097,327 3. Total Title XI Fixed Principal Payments $276,273,234 4. Total Title XI Debt & Equity Cash Cost $438,370,562 5. Interest Rate on CCF portfolio investments 15.90% 6. Total CCF Contributions & Taxes on Withdrawals $137,853,529 7. Total Cash Cost of Vessel with Title XI & CCF $299,950,856 8. CCF Savings over Title XI alone (31.58%) $138,370,567

FINANCING JONES ACT VESSELS NON-CITIZEN LEASE FINANCING & 46 USC 12119 $300 MILLION TIV EXAMPLE EXAMPLE No. 2, TABLE 3 MARAD TITLE XI & CCF 1. Shipyard Price $300,000,000 2. Total Title XI Equity & Interest Payments $162,097,327 3. Total Title XI Fixed Principal Payments $276,273,234 4. Total Title XI Debt & Equity Cash Cost $438,370,562 5. Interest Rate on CCF portfolio investments 26.00% 6. Total CCF Contributions & Taxes on Withdrawals $108,064,660 7. Total Cash Cost of Vessel with Title XI & CCF $270,161,987 8. CCF Savings over Title XI alone (38.37%) $168,208,575

FINANCING JONES ACT VESSELS FIVE POINTS TO REMEMBER First: The CCF Program basic application tax deferrals can extend over periods of 25 years and more, and CCF financing by offshore support vessel owners, vessel operators or shipyards, may allow a complete initial term support vessel fleet build-out before any taxes are paid.

FINANCING JONES ACT VESSELS FIVE POINTS TO REMEMBER Second: The CCF Program deferrals of federal and state taxes, are in effect interest free loans of tax payment monies from the U.S. Treasury and state taxing authorities, and can be used to create owner, operator and shipyard before-tax project working capital, that can be available for most owner, operator and shipyard Jones Act projects with proper planning.

FINANCING JONES ACT VESSEL ASSETS FIVE POINTS TO REMEMBER Third: The NSRP 2008 software that we have discussed was perfected for use in the circumstances of the DUV financings, to provide a means for measuring and sharing CCF benefits in multi- party leasing transactions, in which we sought to maximize the use of the CCF investment sub-ceiling benefits so as to reduce time charter charges to meet Navy DUV Program needs. 40

FINANCING JONES ACT VESSELS FIVE POINTS TO REMEMBER Fourth: In leasing transactions, the CCF tax deferral benefits are internal to the financing transaction itself (rather than depending upon the owner’s sheltering of non-transaction related income) and the sinking fund structures can be used in 12119 leasing and other transactions in which the owner-lessor has no other income subject to shelter. 41

FINANCING JONES ACT VESSELS FIVE POINTS TO REMEMBER Fifth: The CCF Program applications illustrated in today’s “Financing with the Maritime Administration’s Capital Construction Fund” and “Financing Jones Act Vessel Assets” handouts, and the NSRP 2008 sinking fund structures that Tricia Thomas and I discussed, can be adapted for use to reduce an owner’s vessel costs in almost any financing of CCF qualified vessels in Jones Act trades. 42

FINANCING JONES ACT VESSELS THANK YOU